In the current economic environment, where tax burdens constitute a significant part of expenses for both individuals and businesses, it is worth considering the legal options for reducing tax liability offered by the Income Tax Act. These are legitimate tools that allow you to adjust the amount of tax you pay and thus improve your final tax position as well as make better use of your company's available financial resources. In this article, we provide you a few tips on what to keep in mind before the end of the taxation period and the closing of the accounting books.

Costs deductible after payment (condition of payment)

In general, for an expense to be tax-deductible, it must meet the definition of a tax expense under the Income Tax Act. This means it must be recorded in the accounting records and demonstrably serve to generate, secure, and maintain the taxpayer's taxable income. However, for certain types of expenses defined by the Act, it is also necessary to ensure they are paid by the end of the taxation period. Such expenses include compensation payments, rent, costs of marketing and other studies, market research, intermediary fees, costs of consulting and legal services, as well as contractual penalties, late payment fees, interest on late payments, and others. If such expense is not paid by the end of the taxation period, it will temporarily increase the company’s tax base. Subsequently, after its payment in the next taxation period, the tax base will be reduced by the corresponding amount.

Overdue liabilities

If a company has long-term overdue liabilities, it is in its best interest to pay them as soon as possible, as this may negatively impact its tax liability, depending on the amount of outstanding liabilities and the length of time they remain overdue. The Income Tax Act stipulates the obligation to increase the tax base for unpaid liabilities that are overdue for more than 360 / 720 / 1080 days, by 20 % / 50 % / 100 % of the nominal value of the outstanding liability. Conversely, if the company pays the liability in the next taxation period, its tax base will be reduced by the amount of the paid liability.

Overdue receivables

In practice, it is common to face situations where customers do not pay their debts on time, and in some cases, there is a risk that these receivables will not be paid at all. If these receivables have been included in the company’s taxable income, it is possible to create tax-deductible provisions to receivables. Provisions are created in accordance with accounting standards based on the principle of prudence, and their inclusion in tax-deductible expenses is subsequently assessed in accordance with the rules of the Income Tax Act. Tax-deductible provisions typically apply to non-time-barred receivables that have been included in taxable income and for which a period longer than 360 / 720 / 1080 days has passed since their due date. Depending on the number of days past due, the tax-deductible amount of the provision is determined as 20 % / 50 % / 100 % of the receivable’s nominal value.

The Slovak Income Tax Act also regulates how to deal with receivables in other specific situations and at the same time allows, under certain conditions, to tax write-off receivables before the end of the taxation period, which allows to the company to reduce its tax base. While this is an effective method of tax optimization, it is a more complex issue requiring professional analysis and precise record-keeping.

Voluntary Suspension of Tax Depreciation

The Income Tax Act allows for the suspension of depreciation of tangible assets, such as machinery, vehicles, or buildings, for one or more taxation periods. In the subsequent period, the taxpayer may continue depreciation as if it had not been suspended and the total depreciation period is extended by the duration of the suspension. This suspension may be advantageous in situations where the taxpayer wishes to optimize their tax base to avoid losing eligibility for certain tax-deductible expenses requiring a sufficient tax base or to utilize an older tax loss that would otherwise expire. It is also a suitable strategy for businesses seeking to avoid reporting a tax loss in a specific period and have assets that have not yet been fully depreciated for tax purposes. However, this procedure cannot be applied during a tax audit or in the case of amended tax returns for audited periods.

Deduction of Tax Loss

If the taxpayer has reported a tax loss in previous taxation periods, he may apply for a deduction of this tax loss from a positive tax base. The tax loss can be deducted for a maximum of 5 consecutive years following the year it was reported, usually in the maximum amount of 50 % of the tax base for the taxation period in which the deduction is applied. If the tax loss is not utilized within five years, the right to apply it expires.

Tax Rate

The corporate income tax rate for the taxation period of the calendar year 2024 is 21 %. However, if the company’s taxable income does not exceed the amount of EUR 60,000, a reduced tax rate of 15 % will apply. In certain borderline situations, it is important to keep this rule in mind.

In addition to the options mentioned above, there are other ways in which the Income Tax Act allows you to optimize the final tax liability. The key to the effective use of these tools is a thorough analysis, which will help you to maximize tax benefits within the legal framework. Thorough preparation before the end of the taxation period can result in significant savings and financial stability in the following year.