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How to utilize business losses to save tax?
Business Loss
Current year adjusted business losses can be used to set off against other income from the aggregate income for that year of assessment in ascertaining its total income. The other types of income such as other businesses, rental income, interest income, employment income, etc. After offsetting the current year losses against the other income, the amount of business income that is taxable will decrease, effectively leading to a reduction in the tax payable.
Contrary to current year business loss, business loss brought forward from a previous year can only be used to set off against the aggregate of statutory income from each of the business sources. This income does not necessarily have to come from the same business; it can be from another business.
In the event that you cannot utilise the business loss, it can be carried forward to subsequent year. However, there’s a limit. According to Budget 2022, with effect from Year of Assessment (YA) 2019, all business loss that can be carried forward is subject to a limit.
Business losses or accumulated business losses incurred up to the YA2018 can be carried forward for 10 years until YA2028. It is deductible against the aggregate of statutory income up until then. To put it simple, the last year that this loss can be carried forward is YA2028.
If the business loss is incurred from year 2019 onwards, it can be carried forward for a period of 10 consecutive years of assessment. If you cannot utilise these losses that you start incurring from year 2019 onwards, they shall be disregarded after being carried forward for 10 years. Any balance of the amount that is not deductible at the end of the 10-year period will be disregarded.
To illustrate, let’s say ABC Sdn. Bhd. incurred a business loss of RM1.5 million for YA2020. From YA2021 to YA2030, the expected aggregate statutory income from business sources for ABC Sdn. Bhd. is RM100,000 each year and do not have any business loss arise over the years. At the end of YA2030, a total of RM1 million of loss will be absorbed, leaving the balance of RM500,000. As the RM500,000 is not utilised by the end of the 10-year period, it will be disregarded completely.
Have you fully utilised your current year or brought forward business losses? You will be surprised at the difference it can make to the amount of tax that you are required to pay.
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