An accrual fund is an untaxed reserve, a year-end appropriation, which allows you to defer part of the profit tax until later. An accrual fund is an opportunity to periodically transfer the company’s money to a special fund. You can say that you deduct part of the year’s profit from the final result. Because you do this before you calculate this year’s profit tax, you lower the tax to be paid for the year.
According to current Swedish tax rules, you can simply deduct the amounts you choose to deposit in such a fund. In practice, this means that you can defer taxation of part of the result for up to six years. This offers a completely legal, and sometimes even really beneficial, chance for tax planning.
- Legal entities , ie limited companies, economic associations and so on, can make a maximum provision corresponding to 25% of the business’s surplus.
- In sole proprietorships , and as a partner in a Swedish trading company, you may make a maximum provision corresponding to 30% of the surplus after adjustment for deductibles and social security contributions.
On the whole, this creates great opportunities to gain better control over the tax result. In the annual report, accrual funds are between liabilities and equity, which is reasonable when you think about it. Part of the fund actually consists of equity in the form of profit and the other part is liabilities to the Swedish Tax Agency in the form of unpaid profit tax.
In addition to different percentages, on the other hand, accrual funds are managed differently depending on the type of company in question. Let us therefore take a closer look at accruals in both limited companies and individual companies.
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Accrual fund in English
Tax allocation reserve
Why use accruals?
Accrual fund is a way to plan profit and tax over time. As you set aside part of the profit, the result for the year will be lower and the tax you have to pay for the year will be reduced. This way you can even out the profit over several years, which can be good if you see that the result will vary a lot. The reserve in the accrual fund can be your salvation that allows you to withdraw salary for a year when the business falters.
Accruals are also used to retain cash and cash equivalents in operations that would otherwise have disappeared in tax. For example, it is good if you need money to make investments right now.
Accrual fund in limited companies
In the case of limited companies, any provision for an accrual fund must be included in the tax calculation as an annual recurring standard income. This means that a kind of fictitious income, sometimes called interest, is calculated on the basis of the current government loan interest rate the year before the tax year multiplied by the sum of the deductions made for the provision for accruals.
- Previously, the standard income was calculated on the basis of 72% of the government loan interest rate, but nowadays the calculation is always made at 100% of the government loan interest rate.
Sooner or later, the money must be returned from the accrual fund, even if you have the opportunity to let the returned amount be the basis for the year’s provision. The repatriation must either take place within six years or when the business activity settles. As a result of both the peculiarities of the taxation of legal persons and the recent reductions in corporate tax, accruals have generally become a little less favorable, although there are still some situations where the provisions are useful.
- In the event of future deficits, money can be withdrawn from the accrual fund with the result that the tax effect is minimized.
- Use accrual funds to take advantage of future corporate tax cuts. Remember, however, that reversals should often be listed as a percentage.
It is important to remember that legal persons’ provisions and reversals are always reported as appropriations when they are handled as cost and income, respectively. Existing funds, on the other hand, are managed as untaxed reserves. In most modern accounting programs, accrual funds are calculated automatically.
Accounting for companies
Accrual fund in sole proprietorship
When it comes to sole proprietorships, accrual funds have become a very popular way to get a more even income flow. When calculating the result for the year , you can simply make a deduction for the amount you have chosen to transfer to the accrual form. In this way, the tax results for the year are reduced. When you then choose to return the amount, it is taxed as ordinary income. In this way, you have better control over stratum boundaries and income-related deductions.
It is important to remember that in a different company, accrual funds are reported in the income tax return. The reason is, of course, that in this form of company, the main difference is in terms of accounting between own and the company’s assets. But what exactly are the benefits of accruals in a sole proprietorship?
- The possibility of avoiding the higher tier limit for state tax by postponing taxation to a year when sales are lower.
- Postpone taxation to one year when you have the opportunity to make many root and square deductions.
- Raise income tax for a certain year in order to create a sufficient basis for a loan.
Unlike accrual funds in limited companies, you as a sole trader do not have to pay any interest on your provisions. This makes it a relatively simple tool for postponing and planning the company’s taxation. If you think it all seems complicated, you can by declaring on the internet and using the Swedish Tax Agency’s NE appendix get an automatic calculation of provisions for accruals.
Provision accrual fund
Individual companies, owners of trading companies and owners of limited partnerships may make a provision for accruals with 30% of the profit for the year. Legal entities, such as limited companies, may set aside 25% of the profit for the year before tax in accruals.
- The profit for the year before tax in an individual company is SEK 1,000,000.
- This would have meant a profit tax of SEK 400,000 (assuming that the tax is 40%).
- If the sole trader chooses to make a maximum provision (30%) to the accrual fund, SEK 300,000 goes into the accrual fund and the taxable result for the year is SEK 700,000, which means a tax of SEK 280,000 instead of SEK 400,000.
- The same had applied in a limited company, with the difference that the accrual fund amounted to a maximum of 25%.
Guide: Tax and accounting for dividends in limited companies
Return accrual fund
When you set aside part of the result for the accrual fund, you, as I said, withhold the profit from taxation. But it’s not forever. You must always return the money to taxation later. An accrual fund must be returned to taxation no later than the sixth year after allocation. You can always return the fund earlier. You pay the tax the year you return the fund.
Since you can set aside for accruals every year and each provision becomes a new fund, you can have a maximum of six accruals at the same time. When you then start returning, you must take the oldest fund first. Therefore, it is important to keep the reintroduction in mind when planning your liquidity , as you will have to pay money in the form of tax on the profits you return.
Unfortunately, if the business ceases while you have accruals, the tax liability will not disappear, but then the accruals will be returned and taxed.
- Six years ahead, the individual trader must return SEK 300,000.
- Profit for the year before tax after allocation to accrual fund is SEK 500,000.
- With the return of the accrual fund, the tax base will be 500,000 + 300,000 = SEK 800,000.
The tax is paid on the entire amount. It is important to point out that the returned accrual fund may be included in the basis for calculating any new accrual fund, which in the example is then SEK 800,000.
Each new accrual fund is booked in a separate account in the accounts. Let’s go back to the individual company and see how they will book the provision of SEK 300,000. The account classes used are 21 untaxed reserves and 88 year-end appropriations. By debiting untaxed reserves, the taxable profit for the year is reduced. See the example below:
When the company returns the accrual fund six years later, the fund is zeroed by debiting the entire amount from the fund account. On the credit side, we find account 8819 Repayment from accrual fund that increases the taxable profit for that year. See the example below:
Tip: Simple tax planning
Now that we have our feet on accruals, we can look at how they can be used to plan tax wisely.
During the first year, our dear sole trader has made a profit of SEK 1,000,000. SEK 300,000 is set aside in an accrual fund and avoids taxation that year. Next year, the company will make a loss of SEK 400,000. The owner then returns the accrual fund. The result before tax will then be – 400,000 + 300,000 = -100,000 SEK.
Despite the reversal, the company thus has a taxable loss, which means that the sole trader does not pay any profit tax that year and thus not on the SEK 300,000 in allocated profit from the year before.
This means that the owner has avoided paying tax on SEK 300,000 profit, just through smart planning. This way, you can plan in your business, provided you have an idea of what the future holds, that is.
Standard income accrual fund
Limited companies and other legal entities that set aside for accrual funds pay tax in the form of a standard income for the capital allocated in them. The standard interest rate is calculated at 72% of the government loan interest rate in November of the year before the tax year multiplied by the total value of accrual funds at the beginning of the tax year. The limited liability company does not include the standard income in the accounts, but the owner adds it as a tax adjustment in the limited liability company’s income tax return.
- At the beginning of 2020, a limited company had booked SEK 200,000 in accruals.
- The government loan interest rate at the end of November 2019 was 0.37%.
- The standard interest rate for the tax year 2020 will then be 0.0037 x 0.72 x 200,000 = SEK 532.8 .