Starting a business in Japan – Blue tax return for Income Tax

Case 9

<Question>
I will start a business as a solo trader (without establishing a company). I know that Income Tax is supposed to be imposed on     business income but I heard that a tax benefit called the deduction for blue tax (Aoiro Shinkoku Kohjo) is possible by submitting the blue tax application form. Could you tell me the requirements for receiving this tax benefit? 

<Answer>
When solo traders start a business in Japan, they can take advantage of income deduction by filling out the blue tax deduction application form (Please refer to “Starting a business in Japan 18/08/2012”).

Income tax is categorized into several incomes: rental income, business income or forestry income, for example. These are possible incomes that can take advantage of the deduction. The authority requires the following for the blue tax return.

1.    Filing the application form by March 15.
2.    Filing the application form within 2 months if taxpayers start a business  from January 16 of that year.
3.    The taxpayers have to keep correct accounting records and journals. 

If the taxpayers meet the above requirements, the blue tax return provides the tax payers with the following benefits.

1.    A deduction of up to JPY 650,000 is available if the taxpayers maintain double-entry accounting records and include an income statement and balance sheet as an attachment on   their return.
2.    Deduction of up to JPY 100,000 is available if the taxpayers maintain some form of accounting records.
3.    A net loss for a year can be carried back to the preceding year and deducted from the income of that year. The taxpayer may qualify for a refund of Income Tax, if any was paid for that year.
4.    A net loss for a year can be carried forward to the next 3 years.
5.    Immediate right of appeal to the National Tax Tribunal with no requirement to first request a further investigation from the tax office.

JPY 100,000 deduction is available by maintaining some form of accounting records, however, it is unclear what kind of accounting records should be prepared.  Double-entry accounting records are not necessary though, at the least, preparing spread sheets which show revenue, expenditure and cash balance is necessary to receive this benefit.

Reference
Starting a business in Japan – Business operation  25/10/2012
Starting a business in Japan – Opening bank accounts and borrowing money 28/09/2012
Starting a business in Japan – Tax merit (a corporateor an individual owned business?) 10/09/2012
Starting a business in Japan – Consumption tax 03/09/2012
Starting a business in Japan 18/08/2012

By Certified Public Accountant (CPA) & Tax Accontant, Koji Takahashi
Tokyo & Yokohama