BNCs subject to the “controlled declaration” regime must keep cash accounts, i.e. their tax benefit is determined by the difference between the receipts collected and the expenses paid during the year.
However, article 93 A of the CGI provides that it is possible, at the request of taxpayers, to determine the taxable profit by taking into account the receivables acquired and the expenses incurred during the tax year.
We will therefore explain the terms and consequences of this option below.
I – The option terms
The necessary conditions to opt
This option is reserved for taxpayers subject to the controlled declaration regime.
- holders of non-commercial profits whose tax-free revenues for the previous calendar year or the penultimate calendar year exceed the threshold set to benefit from the micro BNC regime;
- taxpayers who, realizing in the same business non-commercial income and commercial income, opt for a real system of taxation of their commercial profits;
- taxpayers who have expressly opted for the controlled declaration regime.
Partnerships exercising a non-commercial activity must determine their profit under the conditions provided for individual operators. Thus, these companies (which are subject to the controlled declaration regime) can opt for the determination of their non-commercial profit according to the receivables acquired and the expenses incurred.
This option must be made by the manager or one of the managers of the company.
The deadline and form of the option
The option must be exercised before February 1st of the first year in respect of which the profit is determined on the basis of the receivables acquired and the expenses incurred.
Taxpayers who wish to opt for this regime from the start of their activity can exercise the option until the deadline set for the filing of the profit declaration for their first year of activity.
In all cases, this request must be established on plain paper and must be sent in single copy to the tax service on which the place of exercise of the profession or the main establishment depends.
The option is then renewed by tacit agreement. It produces its effects as long as it has not been expressly denounced.
Termination of the option
Taxpayers who wish to renounce the benefit of the commitment accounting system must make the request before February 1st of the year in respect of which the profit is determined according to the receipts collected and the expenses paid. The request is established and sent to the tax service, according to the same terms as those described above for the option.
II – The consequences of the option on the determination of the tax result
Preliminary remark: The exercise of this option only makes it possible to substitute the keeping of accrual accounting for the keeping of cash accounting but does not have the effect of extending to BNC holders the consequences of keeping commercial accounting and in particular the establishment of a balance sheet.
Corrections to be made on the first option exercise
The purpose of the adjustments set out below is to avoid the failure to take into account or double counting of income or expenses.
The result is increased by the receipts collected during the same year and which correspond to receivables acquired during a year prior to that of the option. It is reduced by the amount of expenses paid during the year in question and which correspond to expenses incurred during a year prior to that of the option.
Since 2020, in the event of exit from the special reporting regime (micro BNC), the taxable profit for the year in respect of which the option is exercised is increased by the debts held by the taxpayer on December 31st of the previous year, for their amount excluding tax less a deduction of 34%.
Advances, down payments or provisions received during a year prior to the option and in respect of which the profit was determined according to the principle of receipts / disbursements are, when the completion of the services concerned or the delivery of the goods occurs at during a financial year ended after option, deducted from the product of the service or the sale to determine the result to which this product must be attached.
Determination of the tax result
- Receivables acquired: the receivables acquired which must be attached to the taxable result are those which are certain in principle and determined in their amount. It should be considered that the income corresponding to trade receivables is attached to the fiscal year during which the services were performed.
When the taxpayer makes sales of goods, the corresponding products must be considered as acquired in the year in which their delivery took place.
The products therefore include:
- remuneration for the provision of services completed during the tax year;
- for discontinuous services spread over several years, the value of the services performed during the same year;
- income corresponding to the sale of goods delivered during the year.
- Expenses incurred: an expenditure is considered to be incurred when it presents the character of a certain debt in principle and in its amount and that it is, consequently, considered as acquired by the co-contracting party.
This therefore implies the possibility of deducting from the tax result a charge related to professional activity even if it has not been paid during the financial year to the extent that it meets the definition above.
- Provisions: provisions for risks or charges cannot be deducted from the tax result. On the other hand, provisions for depreciation of doubtful or disputed debts as well as losses corresponding to debts that have become irrecoverable are deductible.
Advantages and disadvantages of the option for accrual accounting
- The result of a year is closer to reality, especially when significant expenses are incurred but not paid at the end of the year or when significant revenues are not yet collected while the work is being done.
- Accrual accounting makes it possible to monitor accounts payable and receivable, which cannot be done by cash accounting. The monitoring of third-party accounts is sometimes essential in certain liberal professions.
- The main advantage resulting from this option is the possibility of recording as accrued charges and therefore of tax deduction for the current year, any adjustment of compulsory social security contributions to be paid in the years to come. This adjustment of social charges must be quantified with sufficient precision to be considered as an accrued liability and not as a provision for charges which would then not be deductible from the result.
Indeed, when social organizations know the final profit made by the operator for a given year (i.e. during year N + 1), they calculate the contributions actually due and recover the difference between this amount and the total of installment payments made during year N.
In the case of cash accounting, for the first year of activity or, subsequently, in the event of a significant increase in profit, the non-recognition of the amount of charges actually due lead to a fictitious increase in profit. This abnormally high profit translates into an increase in the balance of social charges as well as higher taxes.
In return, the following year, the deduction of a very high amount of charges (adjustment of N-1 + charges for the year calculated on the basis of the N-1 result) will have the effect of excessively reducing the result of the exercise. This will probably lead to a negative regularization of social charges.
It is obvious that the choice of the recognition of the liability will lead to a smoothing of the result which will have three major consequences:
- Show the profit actually made by the company, which can be important with regard to bankers, suppliers and the manager who wants to know the performance of his company;
- Avoid paying very large sums of social security charges during a financial year;
- Avoid paying income tax at a high rate (due to the progressivity of the brackets) during the years when the income is artificially increased.
- On the other hand, keeping accrual accounting is more complex and requires spending more time than cash accounting.
All the team of French Business Advice is at your disposal to clarify you on this option, so do not hesitate to contact us!
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