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Accounting of income and expenses in agricultural enterprises
Accounting of income and expenses in agricultural enterprises
As is well known, enterprises engaged in the production of agricultural products have been granted exemptions from several types of taxes, including profit tax, in order to promote the development of the agricultural sector in the country, increase local product production, and reduce the population’s dependence on imports. The tax expert Azər Qənbərov comments on the topic.
According to Article 106.1.14 of the Tax Code, the profits obtained by legal entities engaged in agricultural production (including industrial methods) from this activity have been exempted from profit tax for a period of 13 years starting from January 1, 2014. Also, according to Article 106.1.14-1 of the Tax Code, legal entities engaged in agricultural production (including industrial methods) are exempt from profit tax for a period of 4 years starting from January 1, 2023, on their off-sale income, subsidies provided from the state budget for agricultural production, and dividend income of legal entities engaged in agricultural production (including industrial methods) that are participants in resident legal entities operating in this field.
From the above, it is clear that, in general, the agricultural sector and those engaged in the production of agricultural products are exempt from all taxes during the specified period for this activity, including profit tax, which would normally be calculated on the subsidies received from the state budget and off-sale income. To illustrate the exemptions, let's look at an example:
Example: “AA” LLC is engaged in the production of agricultural products and, as a small business entity, purchases seeds worth 100,000 manats, fertilizers worth 120,000 manats, and agricultural machinery worth 300,000 manats, starting operations on leased land with labor. At the end of the season, it earns 650,000 manats from product sales. The total labor costs amounted to 70,000 manats, and the maximum depreciation was calculated on the agricultural machinery. After the season, the company returned the leased land for certain reasons and, after the year ended, sold unused seeds worth 15,000 manats for 20,000 manats, fertilizers worth 25,000 manats at purchase price, and machinery for 230,000 manats to another farmer. In this case, can the income earned by “AA” LLC be exempt from profit tax?
Thus: The company’s income from the sale of agricultural products is 650,000 manats, and the expenses deducted from the income are 340,000 manats:
100,000 - 15,000 = 85,000 manats (seeds);
120,000 - 25,000 = 95,000 manats (fertilizer);
(85,000 + 95,000 + 70,000 + ((300,000 x 20%) x 1.5)) = 340,000 manats.
In this case, the company's profit is 310,000 manats:
650,000 - 340,000 = 310,000 manats.
Since the exemption from profit tax for agricultural production is applied, the taxable income and expenses are reset to zero, and thus the taxable profit will also be zero. Naturally, in this case, "AA" LLC must fully declare its exempt income in the tax declaration. Otherwise, according to Article 58.15 of the Tax Code, a financial sanction of 6% of the undeclared or reduced income (without deducting expenses) will be applied to the taxpayer.
What about the sale of agricultural machinery, seeds, and fertilizers? Will it be subject to tax?
According to Article 13.2.12 of the Tax Code, off-sale income refers to income from participation in the activities of other enterprises, income from shares, bonds, and other securities owned by the enterprise, as well as other income from transactions not directly related to the production and sale of goods and services, including amounts received as fines and compensation for damages, exchange rate differences from foreign currency transactions, and amounts of creditor and depositor debts that have exceeded the claim period as per the legislation.
In this case, while the sale of fertilizers, seeds, and agricultural machinery is related to the sector, it is not considered off-sale income and will be subject to profit tax.
Thus, "AA" LLC will need to calculate and pay a profit tax of 5,000 manats for the sale of these goods and machinery:
(20,000 + 25,000 + 230,000 - 15,000 - 25,000 - 210,000) = 25,000 manats;
25,000 x 20% = 5,000 manats.
Of course, if the maximum depreciation had not been calculated for the agricultural machinery, a loss of 5,000 manats could have occurred. In this case, "AA" LLC should consider its future operations to optimize taxes.
As is well known, enterprises engaged in the production of agricultural products have been granted exemptions from several types of taxes, including profit tax, in order to promote the development of the agricultural sector in the country, increase local product production, and reduce the population’s dependence on imports. The tax expert Azər Qənbərov comments on the topic.
According to Article 106.1.14 of the Tax Code, the profits obtained by legal entities engaged in agricultural production (including industrial methods) from this activity have been exempted from profit tax for a period of 13 years starting from January 1, 2014. Also, according to Article 106.1.14-1 of the Tax Code, legal entities engaged in agricultural production (including industrial methods) are exempt from profit tax for a period of 4 years starting from January 1, 2023, on their off-sale income, subsidies provided from the state budget for agricultural production, and dividend income of legal entities engaged in agricultural production (including industrial methods) that are participants in resident legal entities operating in this field.
From the above, it is clear that, in general, the agricultural sector and those engaged in the production of agricultural products are exempt from all taxes during the specified period for this activity, including profit tax, which would normally be calculated on the subsidies received from the state budget and off-sale income. To illustrate the exemptions, let's look at an example:
Example: “AA” LLC is engaged in the production of agricultural products and, as a small business entity, purchases seeds worth 100,000 manats, fertilizers worth 120,000 manats, and agricultural machinery worth 300,000 manats, starting operations on leased land with labor. At the end of the season, it earns 650,000 manats from product sales. The total labor costs amounted to 70,000 manats, and the maximum depreciation was calculated on the agricultural machinery. After the season, the company returned the leased land for certain reasons and, after the year ended, sold unused seeds worth 15,000 manats for 20,000 manats, fertilizers worth 25,000 manats at purchase price, and machinery for 230,000 manats to another farmer. In this case, can the income earned by “AA” LLC be exempt from profit tax?
Thus: The company’s income from the sale of agricultural products is 650,000 manats, and the expenses deducted from the income are 340,000 manats:
100,000 - 15,000 = 85,000 manats (seeds);
120,000 - 25,000 = 95,000 manats (fertilizer);
(85,000 + 95,000 + 70,000 + ((300,000 x 20%) x 1.5)) = 340,000 manats.
In this case, the company's profit is 310,000 manats:
650,000 - 340,000 = 310,000 manats.
Since the exemption from profit tax for agricultural production is applied, the taxable income and expenses are reset to zero, and thus the taxable profit will also be zero. Naturally, in this case, "AA" LLC must fully declare its exempt income in the tax declaration. Otherwise, according to Article 58.15 of the Tax Code, a financial sanction of 6% of the undeclared or reduced income (without deducting expenses) will be applied to the taxpayer.
What about the sale of agricultural machinery, seeds, and fertilizers? Will it be subject to tax?
According to Article 13.2.12 of the Tax Code, off-sale income refers to income from participation in the activities of other enterprises, income from shares, bonds, and other securities owned by the enterprise, as well as other income from transactions not directly related to the production and sale of goods and services, including amounts received as fines and compensation for damages, exchange rate differences from foreign currency transactions, and amounts of creditor and depositor debts that have exceeded the claim period as per the legislation.
In this case, while the sale of fertilizers, seeds, and agricultural machinery is related to the sector, it is not considered off-sale income and will be subject to profit tax.
Thus, "AA" LLC will need to calculate and pay a profit tax of 5,000 manats for the sale of these goods and machinery:
(20,000 + 25,000 + 230,000 - 15,000 - 25,000 - 210,000) = 25,000 manats;
25,000 x 20% = 5,000 manats.
Of course, if the maximum depreciation had not been calculated for the agricultural machinery, a loss of 5,000 manats could have occurred. In this case, "AA" LLC should consider its future operations to optimize taxes.