Everything You Need to Know about Advance Tax
Usually, most self-employed individuals will pay their income taxes in installments on particular due dates. However, there are some people who prefer to pay it in advance so they can straighten out their bookkeeping and avoid penalties.
Advance tax arises from the differences between tax and accounting regulations when determining the amount for the year including the business income or tax base. These differences have a specific accounting reflection when calculating and accounting for the expense for corporation tax or income tax.
What is Advance Tax?
Advance tax or earn tax is paid prior to the end of the year instead of waiting for year-end to pay the income tax in a lump sum.
The existence of an advance tax can be due to various causes:
Excess amortization
Excess losses
Excess provisions
Expenses recorded before tax accrual
Income recorded after-tax accrual
Amortization Excesses
An excess of amortization occurs when it is amortized at a higher accounting rate than for tax purposes. That is, the tax depreciation coefficient is lower than the one applied in the accounting. As the difference is temporary, it reverts to the tax base when the item is fully amortized in the accounting, the adjustment being of the opposite sign in subsequent years.
Excess Losses
These are cases in which the loss recorded cannot be deducted for tax purposes because it does not meet the requirements set forth by law. One example is when a debt amounting to $5,200 is due three months before the end of the year. It is not tax-deductible in the fiscal year, since six months have not elapsed.
Excess Provisions and Contingencies
This is made up of non-deductible provisions. For example, expenses related to long-term remuneration to personnel that must be allocated as a liability for accounting purposes, or personnel expenses, that correspond to payments based on equity instruments used as the remuneration formula for employees, which will be tax-deductible in the tax period in which benefits are paid or said instruments are delivered.
Expenses Recorded Before Tax Accrual
Erroneous accounting allows the anticipation of an expense or deferment of an income with respect to the tax accrual, but not vice versa. The expense recorded before the accrual is not tax-deductible, so it requires an adjustment that will revert to the base in the accrual tax period.
Income Recorded After-Tax Accrual
It is the same case as above but related to income: in the event of an erroneous accounting of an income, it is allowed to anticipate the tax accrual, but not its deferred allocation.
Don't Stress over Taxes! We Help You Find the Best Offer.
The Time Intervals
Tax is usually paid when income has been earned. With advance tax, the person paying the taxes has to obtain an estimate of the earned income for the whole year. Based on the estimated tax, most people pay at a specific time. Section 208 of the Tax Act indicates that everyone who has a tax liability for the year must have an estimate of $10,000 or more in order to pay the advance or earn taxes. Senior citizens are excluded from paying this tax as long as they are over 60 years old and don’t have a profession or business providing them with an income. The time intervals to pay these taxes are:
June 15th or before – 15% payable
September 15th or before – 45% payable
December 15th or before – 75% payable
March 15th or before – Full payment
Taxable Income
In effect, the taxable income is determined from the accounting result, calculated in accordance with tax regulations, and correcting it by applying the regulations contained within the tax laws. In other words, the tax regulations accept the accounting profit as a starting point to obtain the tax base, defined as the amount of income for the year. This occurs only when there are differences between one and the other is it necessary to make fiscal or extra-accounting adjustments to the said result.
Types of Differences
These differences have a specific accounting reflection when calculating and accounting for income tax expense, which distinguishes between the current tax (income tax for the year and previous ones) and deferred tax, and this is how the differences between the accounting result and the tax base come into play. We can classify the differences between the accounting result and the tax base, according to their origin and their temporary effects.
By Its Origin
The differences may come from different criteria in relation to the standards of:
Qualification: an accounting expense or income is not considered a tax expense or income (or vice versa). Example: the Corporate Tax itself, which is not tax-deductible, being an accounting expense for the year
Valuation: the accounting and tax qualification of the income or expense item matches, but not its amount. Example: correction of inflation in the case of extraordinary profits from real estate operations, which results in lower tax than accounting income
Temporary allocation: in this case, there are no qualification differences of the income or expense item, nor of valuation, but it is the computation or temporary allocation that is different in the tax standard with respect to the accounting one. Example: the income derived from an operation with a deferred cost, or the anticipated expense for the application of the incentive of the freedom of amortization.
By Its Effect (reversibility)
Considering the possibility of recovering the difference, the general accounting procedure would classify them as permanent and temporary:
Permanent differences: They are those that do not revert to the tax base in future years. They come from a different qualification criterion, and that cannot change. In turn, permanent differences can be
Positive: They can be tax revenues that do not have the same consideration from the accounting point of view and always suppose a positive adjustment. For example, accounting expenses that do not constitute tax-deductible expenses.
Negative: This supposes a negative adjustment to the accounting result to obtain the tax base, and can be derived from the different qualifications of an income or an expense. In the first case, the accounting standard considers income an item that is not taxable, as in the tax exemption of dividends and the income derived from the transfer of values representing equity.
Temporary Differences: They are those that have recovered over time, reverting to the tax base of subsequent tax periods. These differences may have their origin in:
Temporary differences: Those that arise from the application of different criteria of temporary allocation to determine the taxable amount and the accounting result. In turn, temporary differences can be:
- Positive, leading to anticipation of the tax
- Negative, which causes a delay
Valuation differences: Those produced by the allocation of income/expenses directly to equity, which is not computed in the tax base; in business combinations (restructuring operations). This also occurs when equity elements are recorded for a book value that differs from the taxable value; or in the initial recognition of an element that does not come from a business combination if its book value differs from the tax one.
Positive Temporal Differences
Positive temporary differences are those that cause an anticipated effect of income tax in the same year since they imply a positive adjustment to the accounting result, either because the tax rule allows deducting a lower amount of expense than that recorded because fiscally, it is necessary to compute a greater amount of income than that accounted for.
Its Benefits
These tax payments are beneficial to the company, individual, and government. From the perspective of the government, these payments provide a constant flow of income throughout the entire year. From the perspective of the company or individual, the advanced payments reduce the tax burden of paying it in one full payment. If it is not paid in a timely manner, then the individual or company would incur interest on the outstanding payments.
How to Calculate Payment
It is not difficult to calculate your payments. There are certain steps to follow. First, you would estimate the income earned in that specific financial year. You should include all income earned from a job, business, freelance work, rental, capital gains, and interest income. Total everything to get the gross taxable income. Use the income tax category that applies to you to calculate how much you should pay.
If the amount is more than $10,000, you will have a tax liability to pay in advance.
Conclusion
It is much easier to pay a portion of your taxes to the government during the year instead of waiting until the end of the year. If you overpay at the end of the year, you will receive a refund, or you can have the amount goes to future tax liabilities.
To avoid tax penalties, you should make sure that your taxes are paid on time. Follow the installment due dates to make sure you are on time. If you are a salaried employee, you do not have to pay taxes in advance. Your employer collects this amount and is responsible for making the payment to the IRS. However, if you have any source of income outside your weekly or monthly pay, you are obligated to pay in advance as long as it is $10,000 or more. We invite you to visit the Goalry Platform and go directly to the Taxry store.