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Change in Accounting Method: Tax Obligations and Tax Benefits
One of the issues of interest to taxpayers is how tax obligations and tax benefits are affected when micro-enterprises change their accounting method for corporate income tax purposes. Does the tax benefit remain available when the accounting method is changed? Is it possible to benefit from the tax relief by filing an amended tax return? Tax expert Altay Jafarov explains these questions through practical examples.
Example 1: “AA” LLC is a micro-enterprise. In 2024, the company had an average of 4 employees. In 2024, the company used the cash basis of accounting and issued electronic invoices to customers for goods, works and services totaling AZN 180,000. Based on its turnover over the previous 12 months, the company qualifies as a micro-enterprise.
Of the AZN 180,000 invoiced in 2024, AZN 130,000 was actually collected. Therefore, as of 31 December 2024, the company had accounts receivable of AZN 50,000.
The company’s management decided to switch from the cash basis to the accrual basis in 2025 and began maintaining its accounting records under the accrual method. In 2025, “AA” LLC issued electronic invoices to customers for goods, works and services totaling AZN 110,000.
Since the company’s turnover over the previous 12 months did not exceed AZN 200,000, it did not become subject to mandatory VAT registration. In this case, what figures should “AA” LLC report in its corporate income tax returns for 2024 and 2025?
As noted above, since the company was a micro-enterprise and used the cash basis of accounting in 2024, its taxable revenue amounted to AZN 130,000. In addition, because the company had an average of more than 3 employees during the year, it qualified for the 75% tax benefit.
Accordingly, in 2024, the company would apply the 75% tax benefit to the profit remaining after deducting business-related expenses from the AZN 130,000 revenue recognized under the cash basis.
Since the company switched to the accrual basis in 2025, the necessary adjustments must be made for tax purposes.
Under Article 130.5 of the Tax Code of the Republic of Azerbaijan, when a taxpayer changes its accounting method, adjustments to accounting transactions affecting the amount of tax must be made in the year in which the accounting method is changed so that no transaction is omitted or accounted for twice.
Therefore, the AZN 50,000 recorded in 2024 as accounts receivable and deferred income under the cash basis must be adjusted in 2025.
If the company had used the accrual basis in 2024 instead of the cash basis, the AZN 50,000 would have been recognized as current-period income and would have been subject to corporate income tax with the applicable tax benefit.
However, since the company used the cash basis in 2024 and switched to the accrual basis in 2025, the accounting adjustment must be made in 2025.
Accordingly, AZN 50,000 will be transferred from deferred income to current-period income in 2025. Therefore, the company’s taxable income in 2025 will be:
AZN 110,000 + AZN 50,000 = AZN 160,000.
Example 2: The transactions of “AA” LLC in 2024 are the same as in Example 1. However, assume that in 2025 the company’s revenue from the sale of goods, works and services amounted to AZN 220,000. As a result, in 2025 the company moved from the micro-enterprise category to the small-enterprise category.
As the transactions in 2024 remain unchanged, how should “AA” LLC account for the AZN 50,000 carried forward from 2024 in 2025? Can the company still benefit from the 75% tax benefit applicable to micro-enterprises in respect of this AZN 50,000?
Let us examine the issue in greater detail. Under Article 132.1 of the Tax Code, under the cash basis, income is considered earned when cash is received or funds are credited to the taxpayer’s relevant account. Therefore, the AZN 50,000 not received in 2024 is not recognized as income for that year.
Article 135.1 of the Tax Code provides that the right to receive income is considered to have arisen when the relevant amount is unconditionally payable to the taxpayer or when the taxpayer has fulfilled all obligations under a transaction or contract.
Under Article 135.2, where a taxpayer performs work or provides services under a contract, income is considered earned when the work or services stipulated in the contract have been fully completed.
Therefore, since the goods, works or services corresponding to the AZN 50,000 were not directly provided in 2025, this amount may not be treated as income attributable to 2025.
If the AZN 50,000 was not recognized as income under the cash basis and the company did not actually provide goods, works or services in this amount in 2025, the question arises: in which year should this amount be recognized as income?
In this case, Article 130.5 of the Tax Code should be applied.
Accordingly, the AZN 50,000 should be recognized in 2025. However, since the company moved from the micro-enterprise category to the small-enterprise category in 2025, the 75% tax benefit cannot be applied to this amount.
Is there another way for the company to benefit from the 75% tax benefit?
For this purpose, “AA” LLC should change its accounting method for 2024, switching from the cash basis to the accrual basis. Accordingly, by filing an amended corporate income tax return for 2024, the company can fully benefit from the 75% tax relief.
One of the issues of interest to taxpayers is how tax obligations and tax benefits are affected when micro-enterprises change their accounting method for corporate income tax purposes. Does the tax benefit remain available when the accounting method is changed? Is it possible to benefit from the tax relief by filing an amended tax return? Tax expert Altay Jafarov explains these questions through practical examples.
Example 1: “AA” LLC is a micro-enterprise. In 2024, the company had an average of 4 employees. In 2024, the company used the cash basis of accounting and issued electronic invoices to customers for goods, works and services totaling AZN 180,000. Based on its turnover over the previous 12 months, the company qualifies as a micro-enterprise.
Of the AZN 180,000 invoiced in 2024, AZN 130,000 was actually collected. Therefore, as of 31 December 2024, the company had accounts receivable of AZN 50,000.
The company’s management decided to switch from the cash basis to the accrual basis in 2025 and began maintaining its accounting records under the accrual method. In 2025, “AA” LLC issued electronic invoices to customers for goods, works and services totaling AZN 110,000.
Since the company’s turnover over the previous 12 months did not exceed AZN 200,000, it did not become subject to mandatory VAT registration. In this case, what figures should “AA” LLC report in its corporate income tax returns for 2024 and 2025?
As noted above, since the company was a micro-enterprise and used the cash basis of accounting in 2024, its taxable revenue amounted to AZN 130,000. In addition, because the company had an average of more than 3 employees during the year, it qualified for the 75% tax benefit.
Accordingly, in 2024, the company would apply the 75% tax benefit to the profit remaining after deducting business-related expenses from the AZN 130,000 revenue recognized under the cash basis.
Since the company switched to the accrual basis in 2025, the necessary adjustments must be made for tax purposes.
Under Article 130.5 of the Tax Code of the Republic of Azerbaijan, when a taxpayer changes its accounting method, adjustments to accounting transactions affecting the amount of tax must be made in the year in which the accounting method is changed so that no transaction is omitted or accounted for twice.
Therefore, the AZN 50,000 recorded in 2024 as accounts receivable and deferred income under the cash basis must be adjusted in 2025.
If the company had used the accrual basis in 2024 instead of the cash basis, the AZN 50,000 would have been recognized as current-period income and would have been subject to corporate income tax with the applicable tax benefit.
However, since the company used the cash basis in 2024 and switched to the accrual basis in 2025, the accounting adjustment must be made in 2025.
Accordingly, AZN 50,000 will be transferred from deferred income to current-period income in 2025. Therefore, the company’s taxable income in 2025 will be:
AZN 110,000 + AZN 50,000 = AZN 160,000.
Example 2: The transactions of “AA” LLC in 2024 are the same as in Example 1. However, assume that in 2025 the company’s revenue from the sale of goods, works and services amounted to AZN 220,000. As a result, in 2025 the company moved from the micro-enterprise category to the small-enterprise category.
As the transactions in 2024 remain unchanged, how should “AA” LLC account for the AZN 50,000 carried forward from 2024 in 2025? Can the company still benefit from the 75% tax benefit applicable to micro-enterprises in respect of this AZN 50,000?
Let us examine the issue in greater detail. Under Article 132.1 of the Tax Code, under the cash basis, income is considered earned when cash is received or funds are credited to the taxpayer’s relevant account. Therefore, the AZN 50,000 not received in 2024 is not recognized as income for that year.
Article 135.1 of the Tax Code provides that the right to receive income is considered to have arisen when the relevant amount is unconditionally payable to the taxpayer or when the taxpayer has fulfilled all obligations under a transaction or contract.
Under Article 135.2, where a taxpayer performs work or provides services under a contract, income is considered earned when the work or services stipulated in the contract have been fully completed.
Therefore, since the goods, works or services corresponding to the AZN 50,000 were not directly provided in 2025, this amount may not be treated as income attributable to 2025.
If the AZN 50,000 was not recognized as income under the cash basis and the company did not actually provide goods, works or services in this amount in 2025, the question arises: in which year should this amount be recognized as income?
In this case, Article 130.5 of the Tax Code should be applied.
Accordingly, the AZN 50,000 should be recognized in 2025. However, since the company moved from the micro-enterprise category to the small-enterprise category in 2025, the 75% tax benefit cannot be applied to this amount.
Is there another way for the company to benefit from the 75% tax benefit?
For this purpose, “AA” LLC should change its accounting method for 2024, switching from the cash basis to the accrual basis. Accordingly, by filing an amended corporate income tax return for 2024, the company can fully benefit from the 75% tax relief.