Are Your Cash Flow Statement Preparations OK?
Introduction
Companies that are experiencing a downturn in their performance due to the COVID-19 disaster are becoming more and more prominent. At times like this, it is essential to create a compilation of funds timetable (cash flow statement).
Why It’s Necessary
In running a business, there are many situations where expenses are due first, such as payments for raw materials or labor costs, before sales proceeds are collected. In addition, loan repayments and capital investment are not expenses, so even though money is paid out, it does not appear directly on the income statement.
Therefore, a monthly trial balance provided by a tax accountant will not show the cash flow.
So it is necessary to prepare a cash flow statement to take into account the timing of collection of sales proceeds, payment of various expenses, repayment of loans, etc., to ensure that there is no shortage of funds.
Some managers of small and medium-sized companies focus only on increasing sales, and do not pay much attention to cash flow. However, in order to prevent a company from going under, it is vitally important to know what the company's financial situation will be in the future. As a business owner, it is a minimum requirement to understand your company's cash flow by creating a cash flow chart, and always keeping track of the projected and actual movements.
Otherwise, if you don't think about cash flow, even if your company is profitable on the books, a shortage of cash can lead to bankruptcy, which is a very real possibility.
If you can foresee a shortage of funds in the future, you can consider measures such as taking out a short-term loan from a financial institution in advance. This will avoid the need to rush to the bank when one is running out of funds.
First, Make It Yourself
You can easily create a cash flow chart yourself by using Excel. There are a lot of things to think about when you try to make a detailed one, but if it's a rough one, it's not that difficult, and it's enough to see the big picture.
Of course, you can ask a tax accountant to prepare it for you, but if you make it yourself first, you will understand it faster and you will be able to see exactly how your company's money is being spent. It is recommended that you make the report by yourself first, and then have it checked by a tax accountant.
For example, even if you have been selected for a business restructuring subsidy, various fees will need to be paid first. This is because the subsidies are only paid after the fact.
Even if you think you have the cash flow of a normal business in mind, you may find yourself in a difficult situation later if you don't make a cash flow chart for a special case - like the usage of a subsidy. It is common for people to feel generous and loosen their purse strings because they are so excited about being selected for a grant.
A key point for creating a cash flow statement is not to try to make it complicated, but to make it simple and easy to understand. Also, when drawing up the statement, be sure to make a slightly strict/pessimistic forecast of your business performance. If your forecast is too optimistic, it will be difficult to predict a shortage of funds.
Reduction of Tax Liability Becomes Possible in Year of M&A Implementation
Introduction
The "Small and Medium Enterprise Business Restructuring Investment Loss Reserve System" was established in the 2021 tax reform. This system allows small and medium-sized companies to include a certain amount of money in their deductible expenses when they carry out M&A.
Details of the System
What exactly does this system, which has a very complicated and long name, "Small and Medium Business Restructuring Investment Loss Reserve System," do?
This is a system that allows a certain amount of money to be included in deductible expenses in order to prepare for the loss from the expected decline in the share price of the acquired shares during the purchaser’s fiscal year in which the merger/acquisition takes place, when a large amount of money is required to purchase the shares of the acquired company. The system is applicable to small and medium-sized companies that have been certified for a management improvement plan between June 16, 2021 and March 31, 2024.
In order to reduce the tax burden in the fiscal year of M&A, it seems that the aim is to prepare for the risk of off-balance-sheet debt by conducting thorough due diligence.
In general, the financial statements prepared by small and medium-sized companies do not necessarily represent the actual situation of the company correctly. There are more companies than you can imagine that do not depreciate their assets in order to make their financial statements look good to banks. There are companies that have factories but do not file or pay any depreciable asset tax. If a buyer doesn't do due diligence, they may end up buying such a company at a high price.
Two Accounting Method Patterns
Under this system, up to 70% of the acquisition cost of shares, etc. can be included in deductible expenses, and for this purpose, it is necessary to accumulate a reserve for loss on investment in restructuring of small and medium-sized enterprises.
There are two ways to accumulate the reserve: ① the reserve method; and ② the appropriation of surplus method. For example, if a company is acquired at an acquisition price of 10 million yen, the journal entry would be as follows:
| Marketable securities: 10 million yen | / | Deposit: 10 million yen |
|---|---|---|
| Restructuring investment loss: 7 million yen |
/ | Reserve for loss on investment in business restructuring of small and medium-sized enterprises: 7 million yen |
Thus, up to 7 million yen, which is equivalent to 70% of the 10 million yen acquisition cost of the stock, can be treated as a loss, reducing the tax burden corresponding to the 7 million yen loss, and allowing the company to allot the money for due diligence.
However, the reserve must be reversed in equal installments over five years after the end of the fiscal year in which the reserve is accumulated and included in income. It is important to note that this is only a temporary tax deferral.
Surplus Disposal Method
Under the appropriation of surplus method, a company can include the surplus as a deductible expense without recording an expense for accounting purposes. For accounting purposes, the following journal entries should be made, and the reserve amount should be subtracted in Appendix 4 of the corporate tax return:
| Marketable securities: 10 million yen | / | Deposit: 10 million yen |
|---|---|---|
| Retained earnings brought forward: 7 million yen |
/ | Reserve for loss on investment in business restructuring of small and medium-sized enterprises: 7 million yen |
Whichever choice, it is the same that taxation is just extended temporarily.
YouTubers in Japan Subject to U.S. Tax?
Introduction
It seems that U.S. taxes are being levied on some YouTubers who are broadcasting in Japan. Why are some YouTubers taxed by the U.S., even though they are broadcasting in Japan? We will explain the reasons.
Video Distribution by Viewers in America
Regarding YouTube, a video hosting website operated by Google, from June this year, it seems that Google has started withholding U.S. taxes on the remuneration generated from videos viewed by American viewers.
Creators living in Japan who upload videos to YouTube are exempted from this withholding by following certain procedures, but creators who have not followed the prescribed procedures are still subject to U.S. tax withholding.
Creators All Over the World Targeted
This time, Google's withholding will be applied to creators around the world who upload videos to YouTube and receive remuneration from viewers in the United States who watch their videos.
As for the remuneration that comes from viewers in the U.S., since it is generated in the U.S., a recipient should pay taxes to the U.S. no matter where they live.
The money paid by Google to creators used to be treated as an advertising fee, but according to Google, they have changed their view, now thinking of it as royalties (royalties for copyright, etc.) rather than as advertising fees, so they now withhold tax based on U.S. tax laws. This is why withholding is now done based on American tax law. Japanese tax law also requires withholding when paying royalties to individuals, so the basic idea may be the same.
Withholding Tax-Exempt If Procedures Completed by May 31
Japan has concluded a Japan-U.S. tax treaty with the U.S., which means that royalties are taxed only in the country of residence (Japan, if one lives in Japan). Therefore, if Japanese creators provide Google with tax information such as their “My Number”, etc., they are exempt from taxation in the U.S., and are only required to file tax returns in Japan.
The deadline for providing this tax information to Google was set for May 31, but it seems that many creators forgot to provide their tax information. In general, when a single income is taxed in two countries, Japan and the U.S., it is possible to eliminate double taxation by using the foreign tax credit when filing a tax return. However, the withholding tax to be collected by Google this time is considered to be of a nature that the foreign tax credit cannot be applied on the tax return.
Claim for a Refund by December 31
As mentioned above, the deadline for providing tax information to Google has already passed, but if you provide your tax information by December 31, you will be reimbursed for any U.S. taxes withheld. For more information on how to provide tax information to Google, please refer to the YouTube Help section, "U.S. Tax Requirements for YouTube Earnings. Please note that the National Tax Agency is cracking down on YouTube and other Internet-based income.
