Income tax: a mini-guide to becoming an expert accountant

In Italy, the tax system provides for numerous direct taxes, including income tax. If an individual or a company performs a service or work, it must pay part of its proceeds to the state.

But how to find your way through this tangled labyrinth of net deductible charges, the consolidated text of income tax, and the single certificate?

Appvizer is here to throw you the Ariadne's thread that will show you the way out. We will try to clarify what income taxes are, how they are calculated and which categories are affected by the different tax burdens.

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Income taxes: definition

In the Italian tax system, there are three types of income tax:

• IRPEF
• IRES
• IRAP

These taxes are recorded as items in the profit and loss account and correspond to the taxes that the state compulsorily demands from the working citizen (employee, freelancer or company owner).

These income taxes are calculated on the taxable income, i.e. the pre-tax gross income (the difference between income and expenses in the income statement) from which tax-related changes are subtracted or added.

IRES

Definition

IRES (acronym for Corporate Income Tax) is an income tax that all companies are obliged to pay for the income they produce. This tax is the same for all companies regardless of the income generated.

Historically, the tax rate was 27.5%, but in 2017 the Stability Law made a change, lowering the rate to 24%.

So if a company generates revenue equivalent to 50,000 or 2 million euros, it will have to pay the same IRES rate, since this tax does not have income-based brackets.

How is payment made?

IRES is paid via the F24 form available online. It is never paid in a lump sum, but through a system of advance and balance payment.

It is therefore required to be paid in two instalments and a final balance. The tax codes are as follows:

• 1st instalment of the advance payment: tax code 2001;
• Second instalment of the advance payment: tax code 2002;
• Balance: tax code 2003.

The advance payment is usually paid in two instalments, but if the amount to be paid is less than EUR 258, then it must be paid in one instalment under ' 2002 tax code'.

The advance payment for this income tax corresponds to the previous year's IRES. If in 2020 your company has paid IRES of EUR 2000 to the tax authorities, the advance payment for 2020 will be EUR 2000.

How is the tax base calculated?

We know that the IRES rate rises to 24% of income. But how do we calculate the tax base from which to deduct this income tax?

It must be remembered that we cannot proceed with the simple difference between income and expenses. In fact, not all expenses are deductible at 100% of income, but at a lower percentage. For example, only 20% of fuel expenses can be deducted.

The IRES tax base is calculated from the annual balance sheet and more specifically from:

Pre-tax income (gross operating profit from the profit and loss account)

+ Increases;

- Decreasing variations;

- Losses carried forward (from the previous year's balance sheet)

= Taxable gross profit => IRES tax base

If we have managed to calculate the taxable base for this income tax, identifying the amount to be paid to the Internal Revenue Service is straightforward, as it equals 24%.

If our taxable income rises to 100,000, the IRES to be paid equals 24,000 euros.

We will then have to record this figure under item E of the income statement.

IRPEF

Definition

The 1973 tax reform gave birth to this income tax, the Irpef (acronym for Tax on the Income of Physical Persons).

This tax, unlike the IRES, is primarily aimed at natural persons, but companies pay it indirectly through their shareholders.

Italian residents pay according to the goods produced on Italian soil or abroad. Non-residents, on the other hand, pay for income generated on Italian soil.

The Agenzia delle Entrate collects a total Irpef of approximately EUR 180 billion annually, about ⅓ of the total tax revenue, making this tax one of the most important.

How is the Irpef calculated?

Irpef, unlike IRES, is a progressive income tax. This means that the rate changes according to the contributory capacity that the individual generates each year. It is therefore a tax based on the income bracket system.

The amount to be paid to the Inland Revenue is therefore the sum of different factors:

• the calculation of increasing rates through the income bracket system
• the possible existence of income deductions
• the presence of tax deductions

For example, an employee whose annual income is 20,000 will have to pay a tax rate of about 17 per cent. A self-employed person who generates an income of 50,000 euro will have to pay a figure of approximately 30 per cent.

Exceptions to paying Irpef

The personal income tax irpef is a tax that has to be paid every year. However, what is called the ' No tax area' is the exception to paying Irpef. This term indicates the non-technical name of the income bracket to which a zero tax corresponds.

This exception is not regulated by law, but results from the presence of the various deductions for employment or pension or freelance work. These deductions follow a decreasing system according to income.

This is why the no tax area changes according to the type of worker:

• 8,145 euro for employees,
• 8,130 euro for pensioners,
• EUR 4,800 for the self-employed.

The no tax area is also established according to the type of household and family loads. For example, for a single-income family consisting of two parents and two children, the no tax area is around EUR 16,340.

However, the elimination of this income tax entails additional taxes at regional and municipal level.

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IRAP

Definition

IRAP (acronym for regional tax on productive activities) is a tax that is calculated on the basis of the value of production generated by companies.

In Italy, this income tax was introduced during the Prodi government by Finance Minister Vincenzo Visco through Legislative Decree 446/199.

The IRAP tax can be considered in its own right a proportional tax, calculated on the basis of the annual revenue generated by a company. Thus, the taxable base to which this proportional system applies is exactly the difference between a company's revenues and costs, related to its core business.

What are the rates?

Since IRAP is a regional tax, in order to know its rate, those concerned must contact their region of reference.

The basic rate has been set nationally at around 3.9 per cent, but each region has the option of deciding on a higher or lower rate by one percentage point, depending also on the different types of business.

For whom is it compulsory?

Who is obliged to pay this tax? Updated to 2020, the list of categories is as follows:

• IRES taxpayers
• partnerships and similar entities
• individual business entrepreneurs
• exercising arts and professions, also in associated form
• public administrations.

Which categories are exempt?

1. Holders of agrarian income. The 2016 Stability Law repealed the part of the IRAP decree concerning entities operating in the agrarian sector. Hence, the IRAP exemption is available to actors in the agricultural and fishing sectors, whether they are sole proprietorships, simple companies and non-commercial entities, or partnerships or corporations.

2. The minimum taxpayers of the flat-rate scheme. Persons carrying out a commercial business activity or professions that fall under the favourable tax regime for young entrepreneurs and workers considered to be in mobility.

3. Door-to-door salesmen.Those engaged in door-to-door sales do not have to pay IRAP tax, as they are already obliged to pay withholding tax.

Why was it introduced?

In Italy, the income tax for productive activities Irap was established to subsidise the National Health Service through a regional tax.

As regards the applicability of the tax, the Italian government decided in Article 2 of Legislative Decree 446/1997 that the requirements guiding the principles of Irap are the following:

-habituality: the business activity must be carried out continuously

-autonomy: persons subject to this tax must prove that their activity has an organised structure in the form of a company. Self-employed persons and entrepreneurs are therefore not obliged to pay this income tax.

Do you see the light at the end of the labyrinth? We hope we have been clear and precise. But if you still have any doubts, do not hesitate to write in the comments.