Certain capital gains can be neutralised by forming a reserve in accordance with Section 6b of the Income Tax Act (EStG). As part of tax relief to mitigate the consequences of the corona crisis, the legislator is granting an extended period here.
In many companies, initial preparations for the preparation of the 2021 annual financial statements are already underway. When building up reserves, companies should bear in mind that they may be able to benefit from tax relief. When companies take restructuring measures, it may be necessary to sell assets and acquire new assets.
Example: Company A hires a large number of new employees to expand even further. However, the office building is too small. A therefore decides to build a new office building on another plot of land and to sell the old building and land.
Tax-neutral investing
According to Section 6b of the Income Tax Act, the sale of an asset can be tax-neutral in the case of reinvestments. How so? Section 6b provides for the transfer of hidden reserves in the event of the sale of certain fixed assets. In the financial year of the sale, a reserve can be formed in the amount of the capital gain.
The reserve must be dissolved after the expiry of the so-called reinvestment period to increase profits. So if no investment has taken place by the deadline, then the reserve must be dissolved. The reinvestment period is generally four years (six years for real estate). There are special features for renovation and development measures.
Tax relief during the Corona pandemic
In the context of the Corona pandemic, the legislator has taken various tax measures to mitigate the economic consequences for companies somewhat. Many companies recorded falling sales and liquidity difficulties. If reserves have to be dissolved in this phase to increase profits and taxes have to be paid accordingly, then this exacerbates the economic situation of a company even more.
Extended reinvestment periods
With the Act on the Modernisation of Corporate Income Tax Law, the reinvestment deadlines have been extended again, as the pandemic is still ongoing. As a general rule, if the reserve were to be dissolved at the end of the financial year ending after 29 February 2020 and before 1 January 2021, then the period is generally extended by two years. If the dissolution would have to take place at the end of the financial year ending after 31 December 2020 and before 1 January 2022, then the period is extended by one year (Section 52 (14) EStG).
Also extended deadline for the investment deduction amount
Reinvestment deadlines have also been extended in connection with other tax measures. For a planned investment in certain assets, companies can make a profit-reducing investment deduction. The legislator also grants extended investment periods for the investment deduction amount. Especially in connection with investments, companies can therefore take advantage of tax relief.
Excursus: Reserve for replacement procurement
Reinvestment deadlines must also be observed when setting aside replacement procurements. The tax authorities are granting an extension here. The Federal Ministry of Finance, for example, has already taken a clear position in a letter dated 13 January 2021: “The deadlines for replacement procurement or repair in the event of damage regulated in R 6.6 (4) sentences 3 to 6, (5) sentences 5 and 6 and (7) sentences 3 and 4 EStR are each extended by one year if the specified deadlines would otherwise expire in a financial year ending after 29 February 2020 and before 1 January 2021.”
Result
The tax and accounting treatment of investments has a significant impact on taxable profits. Companies should seek expert advice here and find out which options apply and how to ideally proceed in each case. This can significantly strengthen a company’s financial situation.
Image source: Pixabay, Photographer: RonaldCandonga
Author
Sylvia Meier
Guest Author
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