In sole proprietorships, the entrepreneur who takes more money than the profits made obliges his company to borrow (loan or overdraft).
The interest paid by the company in this case is not tax deductible. For the tax authorities, these are charges incurred in the personal interest of the entrepreneur.
The reinstatement is done on the 2058-A or 2033-B slips of the BIC/IS tax return.
When the sum of account 108 farmer’s account and account 101 individual capital gives a debit situation, the farmer has taken more money than he has earned. Interest on loans and bank overdrafts or financial charges in the broad sense become personal expenses and the deduction of financial charges is no longer authorized for tax purposes.
The amount of non-deductible interest and financial charges must therefore be calculated and reintegrated extra-accounting on the tax return. They increase the income tax base.
As a reminder, an individual capital and an account of the creditor operator do not make it possible to calculate interest in favor of the operator of the sole proprietorship (BIC) or business manager.
Why is the deductibility of financial expenses limited in sole proprietorships?
In a sole proprietorship, the results of previous years and the levies of the operator increase or decrease the individual capital. This is the direct consequence of the absence of separate assets of the sole proprietorship because traditionally (except in the particular case of the EIRL and its assets of assignment), a natural person can only have one asset.
If the farmer withdraws more money than his profits allow (or if the company makes losses) and his contributions, the sum of the following accounts can give rise to a debit situation:
- account 101000: individual capital;
- account 108000: operator account.
The tax authorities challenged the deductibility of financial expenses then considered to be borne in the interest of the operator and not in the interest of the company.
Of course, nothing prohibits a sole proprietor from having an individual capital account and an operator’s account in debtors. This situation is totally different from that of partners in companies whose current account must always be in credit (account 455 and not 108).
Account of the debtor operator: how to calculate the non-deductible part of the interest paid by the sole proprietorship?
The non-deductible part of the interest is calculated according to the average annual debit balance of the operator’s account, or according to the average of the annual net withdrawals.
Example of calculating non-deductible interest in a sole proprietorship
A farmer borrows 30,000 on January 1.
The annual amount of interest paid is 3,000.
On June 1, the bank grants him an overdraft of 5,000.
He paid 500 agios.
Movements in the operator’s account were as follows:
- balance at December 31, N-1: 5,000;
- previous year’s result: 25,000;
- March 1: levy of 45,000;
- June 1: contribution of 20,000;
- September 1: levy of 15,000;
- 1 December: contribution of 25,000.
The calculation of non-deductible financial expenses is done in three steps each time the accounts alternate between debit and credit balances.
The first stage consists of calculating the most favorable average, the second makes it possible to determine the average amount of loans and advances made by the operator, for example when he pays the company’s invoices himself. The third and final step is the calculation of the financial expenses to be reintegrated extra-accounting (limit of deductibility of financial expenses).
Step 1: Determine the most favorable average
The average annual balance of the operator’s account or account 108:
(30,000 * 2) + (30,000 – 45,000) * 3 + (-15,000 + 20,000) * 3 + (5,000 – 15,000) * 3 + (-10,000 + 15,000) * 1 = 15 000
15,000 / 12 months = 1,250
The average of the operator’s net withdrawals:
(-15000)*3 + -10000*3 = 75000
75,000 / 12 months = 6,250
Step 2: Determine the average amount of loans and advances made by the operator of the sole proprietorship
30,000 * 12 + 5,000 * 7 = 395,000
395,000 / 12 = 32,917
Step 3: Determine the non-deductible amount of interest to be reinstated
(3,000 + 500) * 1,250 / 32,917 = 133
The deduction of interest calculated on borrowed funds will therefore only be partial.
How to reintegrate the non-deductible interest on the tax return of the sole proprietorship into the income tax?
The non-deductible portion of this interest is reintegrated. These sums will increase the tax result of companies for income tax in the category of industrial and commercial profits or BIC. Companies with corporate tax or IS are not affected.
Non-deductible personal benefits
|Borrowing interest and non-deductible financial costs||