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Calculation of income and deductions related to long-term contracts
Calculation of income and deductions related to long-term contracts
Article 138 of the Tax Code regulates the accounting of income and deductions from income under long-term contracts. A long-term contract refers to contracts where the production, installation or construction, or related services and works, stipulated in the contract, are not completed during the tax year and the contract term is at least 6 months.
Tax specialist Hakim Mammadov explained how to calculate income and deductions from income in long-term contracts as required by the legislation.
According to Article 138.2 of the Tax Code, if a taxpayer keeps records using the accrual method, income related to long-term contracts and deductions from this income are recorded in accordance with the actual volumes of contract performance during the tax year.
The actual volume of contract performance is determined by comparing the costs incurred during the tax year with the total estimated costs stipulated in that contract.
Example: An enterprise engaged in construction and installation works keeps records using the accrual method. In November 2023, the enterprise concluded a contract with the customer for 300,000 manat (excluding VAT). According to the terms of the contract, construction and installation works must be completed within 8 months. The estimated cost of construction and installation works is 180,000 manat (excluding VAT).
As can be seen, all the requirements of the above-mentioned article of the Tax Code have been taken into account here. By the end of December 2023, the enterprise actually incurred expenses of 54,000 manat (excluding VAT) for construction and installation works under the contract. This is 30% of the total estimated costs:
(54,000: 180,000) x 100 = 30%
The actual volume of contract execution in 2023 was 90,000 manat:
300,000 x 30% = 90,000 manat.
The calculated profit under the said contract in 2023 was 36,000 manat:
90,000 – 54,000 = 36,000 manat.
In this case, the profit tax to be paid on the profit earned will be 7,200 manat:
36,000 x 20% = 7,200 manat.
Article 138 of the Tax Code regulates the accounting of income and deductions from income under long-term contracts. A long-term contract refers to contracts where the production, installation or construction, or related services and works, stipulated in the contract, are not completed during the tax year and the contract term is at least 6 months.
Tax specialist Hakim Mammadov explained how to calculate income and deductions from income in long-term contracts as required by the legislation.
According to Article 138.2 of the Tax Code, if a taxpayer keeps records using the accrual method, income related to long-term contracts and deductions from this income are recorded in accordance with the actual volumes of contract performance during the tax year.
The actual volume of contract performance is determined by comparing the costs incurred during the tax year with the total estimated costs stipulated in that contract.
Example: An enterprise engaged in construction and installation works keeps records using the accrual method. In November 2023, the enterprise concluded a contract with the customer for 300,000 manat (excluding VAT). According to the terms of the contract, construction and installation works must be completed within 8 months. The estimated cost of construction and installation works is 180,000 manat (excluding VAT).
As can be seen, all the requirements of the above-mentioned article of the Tax Code have been taken into account here. By the end of December 2023, the enterprise actually incurred expenses of 54,000 manat (excluding VAT) for construction and installation works under the contract. This is 30% of the total estimated costs:
(54,000: 180,000) x 100 = 30%
The actual volume of contract execution in 2023 was 90,000 manat:
300,000 x 30% = 90,000 manat.
The calculated profit under the said contract in 2023 was 36,000 manat:
90,000 – 54,000 = 36,000 manat.
In this case, the profit tax to be paid on the profit earned will be 7,200 manat:
36,000 x 20% = 7,200 manat.