Can losses in self employed income be offset against PAYE income

[Jiggahoney]

Hi,

I am a PAYE worker. I will shortly have an opportunity to purchase agricultural land which joins my our family farm. My family are actively farming and I will be able to generate a small income from the purchased land. I am planning on using savings and a loan to fund the purchase but will make a loss on the self employed income on an annual basis for a number of years. I think its possible to offset the annual interest element of the agri loan against my agri income which will result in the annual loss. Can this self employed loss be offset against my paye income? I will still be paying tax on paye basis monthly but will include details of the self employed loss on my annual tax return. I would expect a tax refund as a result.

Can you please tell me if I am correct in my thinking?

Thanks in advance

 

[Leaky1]

You can elect to offset the trading loss against your paye income. It is an election under Section 381 TCA 1997. If you look at the Form11 you will see a section under trade income where you can make this election. You must make this election within 2years of the year in which the loss occurs - so if you have a loss in the year 2012 you have until 31st Dec 2014 to notify Revenue that you wish to set it against the paye income for 2012.

 

[Jiggahoney]

Many thanks for the details, I will read up on the relevant act. Do you know any reason not to elect to offset. I will definitely have a loss for a number of years and can't see any reason not to offset.

 

[mandelbrot]

Many thanks for the details, I will read up on the relevant act. Do you know any reason not to elect to offset. I will definitely have a loss for a number of years and can't see any reason not to offset.

It all depends on your level of other income in the year in question TBH.

Say your other income is 20,000; your tax credits would mean that you're only being taxed on about 3,500 of this income, o let's call it €700 PAYE paid.

Now let's say you've made a trading loss of 10,000. If you elect under S.381 to have this used in the current year, it reduces your income to 10,000 (20k - 10k). Your tax credits would exceed the tax payable on that income, and therefore you'd get a refund of the €700 of PAYE paid.

So, you've used 10k in losses in order to get 700 back; that's 7% tax relief.

Now, if you expect that in the next year or two you'll return to profit in the trade, then all other things being equal, you'll be taxed on the profit at 20% (or maybe 41%). Carrying the 10k forward and using it then, would save you at least 2k (possibly 4.1k).

That's just an example to illustrate the point - you have to consider how much tax you can save now by using the relief this year, versus how much you can save by carrying it forward, and how far away that is.

 

[Gervan]

If it's a farming loss, losses after 3 years aren't allowed; it's clearly "hobby" farming if not turning a profit at that point.

 

[smeharg]

If it's a farming loss, losses after 3 years aren't allowed; it's clearly "hobby" farming if not turning a profit at that point.

Yes, it must be undertaken on a commercial base with a view to making profits.

This restriction is on offset against other income arising in the same year. There's no restriction on carrying forward for offset against future farming profits.

 

[Jiggahoney]

It will be ran on a commercial basis but due to the repayments on the loan to purchase the land versus the income it will generate it only be able to trade as a loss when paying the loan. I am a classified as a young trained farmer based on courses I have completed and should be exempt from paying stamp duty on the land. I stand to inherit agricultural land in the future but its not viable for me too solely farm at present as I don't own any agriculture land and my father is actively farming, it is my intention in the future.

The land in question joins my potential future holding and is of future strategic importance to me. From the posts it seems I can offset the losses against other income for 3 years and then I can carry forward the losses for offset against future farming income.

 

[Joe_90]

It will be ran on a commercial basis but due to the repayments on the loan to purchase the land versus the income it will generate it only be able to trade as a loss when paying the loan.

Dont confuse profit ie income less expenses with cash flow income less expenses and capital element of loan repayments.

You need to make sure you fulfill the working time requirement for stamp duty relief.