Concerning Year-end Tax Adjustments for 2019
Introduction
Due to the significant revision of the laws relating to exemptions for spouses in the year-end tax adjustment last year, we often hear that administrative guidance has been given by tax offices for mistakes regarding application or amounts.
Revisions last year
The mechanism of exemption for spouse and special exemption for spouse has changed significantly since last year’s year-end tax adjustment.
It was decided that exemptions for spouses are to be limited to cases where employment income earners’ total income is ￥10 million or less (￥12.2 million before deductions on an annual basis). Furthermore, even when the income is 10 million or less, the deduction amounts will differ according to three income categories: ￥9,000,000 or less; from ￥9,000,001 - ￥9,500,000; and ￥9,500,001 - ￥10,000,000 . Also regarding exemptions for spouses, the deduction amounts shall further differ depending on nine separate categories of spouses’ total income.
As total income of an income earner and their spouse is estimated by the filing date for an “application for an exemption for an employment income earner’s spouse”, the revision is apt to be misunderstood when compared to the process thus far.
Dealing with errors
As stated above, it is easy to make mistakes regarding the current spousal exemptions, as well as special exemptions for spouses. Therefore, it will be important to confirm in advance how to deal with cases where errors are found.
As total incomes of an income earner and their spouse are estimated by the filing date for an “application for an exemption for an employment income earner’s spouse”, differences often arise between estimated sums and actual income amounts due to overtime pay for December and winter bonuses.
In such cases, generally an application for a spousal exemption is returned to the employee, and (s)he is asked to correct the information entered.
Also, we can foresee cases where (even after the year-end adjustment) the estimated sums or other figures change prior to December 31, such that the exemption amounts also change - or even that the applicability of the spousal exemption itself might be affected.
When the amount of tax paid differs from the amount due, either a refund is generated for excessive tax payment, or additional taxes are due when insufficient tax was collected. In both situations, the necessary adjustments must be made by:
- Making a “re-year-end adjustment” by the time the tax withholding slip for January of the following year is prepared;
- Correcting the sum via the employment income earner filing a “tax return”.
No major changes regarding this year’s year-end adjustments
Though there are no significant changes from last year in regards to this year’s year-end adjustments, care must be taken regarding withholding taxes for 2020, due to the tax withholding tables for employment income having been revised. It is necessary to use the “2020 tax withholding table for employment income” for tax withholding on salaries and so on to be paid after January 1, 2020.
How to Account for Point Refunds
Introduction
Cashless settlement point return systems have started for a limited time in conjunction with the increase in the consumption tax rate. Convenience stores are adopting “immediate allocation” methods, with points being allocated to the purchase price at the time of purchase. Should these be called discounts?
Point return system
Under the cashless settlement point return system, points are given to customers based on purchase amounts - 5% of the total at regular small or medium-sized stores, and 2% at franchise chains, etc., such as convenience stores.
There are four return methods: points being awarded; immediate allocation; offsetting; and allocation to an account. Many stores are adopting “point plans” where points can be applied towards future purchases. On the other hand, major convenience stores have adopted “immediate allocation” methods. As the latter term suggests, the points provided at the time of purchase are applied immediately to the purchase total.
Let’s look at specific examples
For instance, when a person purchases product A with a consumption tax rate of 10% (costing ￥1,100 including tax) and product B with a tax rate of 8% (￥540 including tax) using cashless settlement at a convenience store, the receipt will be printed as: total product cost of ￥1,640; rebate for cashless payment of ￥32 ; and 〇〇money payment of ￥1,608 .
At first glance, one gets the impression that ￥32 has been discounted from the ¥1,640 cost, with the total amount paid being ¥1,608. This method may indeed seem to be treated as discounts, and some practitioners are raising concerns that immediate allocation may correspond to so-called “discounts”.
If this corresponds to discounts, then it becomes necessary to consider which goods (A or B or both) were discounted, which gets complicated in situations where more than one tax rate is applied. The amount of consumption tax paid on the store’s tax return may be affected.
Immediate allocation ≠ discount
However, as mentioned above, immediate allocation is a mechanism that allocates on the spot the number of convertible points from the reward points system corresponding to the amount paid. That is, this is not a discount resulting in a reduction of 〇〇％ in the price of goods.
Therefore, journalizing will be as follows, with an amount equivalent to the provided point total being added as miscellaneous income.
| supplies expense ￥1,000 | cash（electronic money, etc.）￥1,608 |
| temporary consumption tax（10%）￥100 | miscellaneous income（tax-free）￥32 |
| supplies expense ￥500 | |
| temporary consumption tax（8%）￥40 |
Regarding purchase tax credits, the tax-included ￥1,100 for product A and ￥540 for product B will, as-is, become the tax amounts on taxable purchases. Also, please don’t forget to add the point total as miscellaneous income.
Regarding Software Acquisition Costs
Introduction
The tax treatment of acquisition costs of depreciable assets such as software is sometimes a cause for disagreement in tax investigations. It will be important to differentiate between items requiring asset reporting and items on which one-time deductions may be reported.
Costs for setup, etc., are included in acquisition costs
Acquisition costs of purchased depreciable assets will be the total amount of “consideration for purchase of said assets (freight inward, cargo handling expenses, transportation insurance premiums, purchase commissions, customs duties and other costs paid for purchasing said asset, if any)” plus “costs directly paid to provide said asset for use”.
For instance, when purchasing packaged software on the market, in addition to the consideration paid for the software itself, costs necessary for installation and adjustments to company standards need to be included in acquisition costs through “costs directly paid to provide said asset for use”. Treating such costs as temporary expenses is not allowed.
On the other hand, purchasing packaged software developed by other company, it is a troublesome issue deciding whether consulting fees regarding installation software and vendor correspond to “costs necessary for the asset purchase”.
Prior to an “installation” decision, or after
Regarding this point, though it depends on the nature of the transaction, costs paid during the process when the purchase was being considered generally will not correspond to “costs necessary for the asset purchase”; therefore, they need not be included in the acquisition costs, and are allowed to be treated as temporary expenses.
An important factor is to judge whether the cost was for the decision-making concerning “installation”, or else for actual installation expenses after the “installation” decision was made.
Resemblance to due diligence fees
This line of thinking resembles that of the handling of due diligence expenses incurred in regards to a corporate acquisition. Regarding due diligence fees, the treatment will differ depending on whether due diligence with the aim of acquisition was carried out before the acquisition decision was made, or after.
Due diligence fees paid to decide which firm to acquire from among several candidates before the decision is made are included in deductible expenses as temporary expenses, as it can’t be said that they were spent for the acquisition of securities.
On the other hand, due diligence fees incurred to determine the purchase price after the acquisition decision has been made are included in acquisition costs of securities as expenses under the assumption of making an acquisition.
Again, whether incurred before the decision was made or afterward is an important criterion. If accounted for as temporary expenses, it needs to be made clear (with company documents such as requests for approval) that the expenses were incurred before making the decision.
