How to calculate IRES: all the instructions to follow
Calculating IRES is not one of the simplest and most straightforward accounting operations to perform. On the contrary, as IRES is one of the most burdensome forms of taxation, it is a very complex procedure. For this reason, it is often necessary to consult an accountant for the calculation in order to avoid making mistakes during the entire process.
Even if one relies on a professional for bookkeeping, it may, however, be useful to understand the mechanisms for calculating corporate income tax.
In the following article we will provide you with all the information you need to understand not only how IRES is calculated, but also what tax it is and who has to pay it.
What is IRES?
IRES is an acronym that stands for Corporate Income Tax. It is a tax levied on Italian capital companies .
This tax has been in force since 2003, when it was instituted by means of the Tremonti Tax Reform. However, until 2008, it was known as Irpeg (Imposta sul Reddito delle Persone Giuridiche). The change came about as a result of the attempt to align the Italian financial system with the European tax system.
Like IRAP, IRES is also a tax that must be paid by anyone carrying out a business activity and is levied on entities and companies, i.e., companies that are set up as corporations. It must be paid on their taxable profits.
Who has to pay IRES?
IRES must be paid by taxpayers as defined in Article 73 of the TUIR. These correspond to:
- Capital companies, such as S.r.l., S.p.a. and S.a.p.a;
- Cooperatives;
- Mutual Insurance Companies;
- Entities, both public and private, including trusts.
To be more precise, it is possible to divide taxpayers into 3 categories, namely:
- Entities and Capital Companies resident in Italy that engage in commercial activities;
- Entities and Capital Companies not resident in Italy, but which perform at least part of their activity in the country;
- Public and private non-commercial entities other than companies resident in Italy that do not engage in exclusively commercial activities.
What are the criteria for identifying the taxpayers liable to pay IRES?
The criteria applied to identify the categories of taxpayers liable to pay IRES are set out in Article 73 of the TUIR. These are:
- The criterion of residence, according to paragraph 3 of Article 73;
- The criterion of the object of the activity, according to paragraph 4/5 of the TUIR.
How is IRES calculated?
To understand how much IRES must be paid, two steps must be taken:
- Determine the taxable base;
- Apply the IRES rate to the taxable base.
Determining the tax base
In order to perform the IRES calculation, it is necessary to determine a tax base. In fact, the IRES will result from applying the reference rate to this tax base.
The tax base is determined using a different method depending on the type of taxable persons taken into consideration. Let us see the different cases below:
→ For Resident Companies and Commercial Entities
The determination of the tax base for resident Companies and Commercial Entities takes place on any type of business income (from any source).
The calculation starts by taking into account the value of the profit for the year recorded in the profit and loss account.
In this case, then, the TUIR provides for particular percentages of deductibility (relating, for example, to entertainment or telephone costs, and so on). Depending on the amount of the latter, it will therefore be necessary to adjust the value a posteriori.
→ For Resident Non-Commercial Companies and Entities
The determination of the taxable base for Resident Non-Commercial Companies and Entities is based solely on income generated in Italy.
Also in this case, one must start from the value of the profit for the year recorded in the profit and loss account. However, in this case, account must be taken of the nature of the business entities in question, because this difference determines the differences in the determination of the tax base.
Indeed:
- If they are Capital Companies and Non-Resident Commercial Entities but have a permanent establishment on Italian territory, the criteria for determining the taxable base are the same as those valid for Resident Commercial Companies.
- In the case of Non-Resident Joint-stock Companies and Commercial Entities that do not have a permanent establishment on Italian territory, the determination of the taxable base is subject to the rules imposed by the TUIR on Irpef;
- In the case of non-resident companies and non-commercial entities, the determination of the taxable base is subject to the rules provided for resident non-commercial entities.
→ For Non-Commercial Companies and Entities
In this case, the regulatory references valid for determining the taxable base for Non-Commercial Companies and Entities are Articles 143-149 of the TUIR.
The taxable base, in this case, is determined by applying the rules provided for natural persons. In fact, the total income this time results from the aggregate of the individual income categories subject to the IRPEF rules.
Applying the IRES rate to the tax base
There is a fixed statutory rate that must be applied to the tax base of the income reported in the income statement.
This, from 1 January 2017, corresponds to 24%. Until 31 December 2016, it was 27.5%.
The next steps
Once these procedures have been completed, the actual calculation of the IRES follows the following steps:
Step 1 → add the increasing tax changes to the gross profit. Gross profit consists of the difference between revenues and costs incurred by a company in producing a good or providing a service.
Step 2 → the result of the previous step must, at this point, be subtracted from the result of the previous year's tax loss.
Step 3 → application of the ACE (Aid to Economic Growth), i.e. the deduction of net taxable income obtained by multiplying the tax base by a rate set at 1.3%.
It is with this last calculation that the net income for IRES purposes will be exactly obtained.
New for the calculation of IRES 2021
As of 2021, an important innovation, called the 2021 Ecobonus, came into effect. The Ecobonus consists of a tax bonus that allows a deduction of up to 75 per cent for energy-saving and energy-efficient works in buildings.
Deductions can be applied, for example, to expenses incurred for the purchase of solar panels or hot water production.
Methods of payment of IRES
IRES is paid by filling in Form F24, available and downloadable on the Agenzia delle Entrate website. Certain tax codes must be entered in the form, such as:
- 2001 for the advance payment of the first instalment of Ires;
- 2002 for the advance payment of the second instalment or lump sum payment;
- 2003 for the Ires balance;
- 2004 for the additional tax;
- 1668 for interest on deferred payment by instalments;
- 1132 for the unreinvested capital gain from the disposal of qualified participation;
- 1990/8918 for tax amnesty for non-payment of IRES.
Deadlines
The current deadlines for payment of IRES are:
→ 16 June for the first advance payment for the year in question (corresponding to 40%) and the balance for the previous year.
→ 30 November for the payment of the second advance (corresponding to 60%).
Deductibility and deductions
The subject of IRES deductions is rather complex. Mainly because the deductions applicable to the tax base are variable depending on the year of reference. For example, it is possible that:
- Fuel costs for cars are considered deductible at 20%;
- Fines are not deductible;
- Directors' fees, if not yet paid but shown on the balance sheet, are not deductible.
Now that you are more familiar with IRES, are you ready to confront the calculation of this tax? If you have any doubts or difficulties, ask for our advice, our staff will be happy to help you out. Leave a comment in the appropriate section below!
Article translated from Italian