Loss Carryforward Cap and Tax Adjustments for a Non-SME Corporation
Hanlim Machinery Co., Ltd. is a domestic corporation that is not a small or medium enterprise. For the fiscal year ended 31 December 2024 its accounting profit before tax was 480,000,000 KRW. Two items in that profit need attention: a traffic fine of 20,000,000 KRW paid to a government office, and depreciation of 140,000,000 KRW, although only 100,000,000 KRW is allowable under the Corporate Tax Act. There are no other adjustments and no tax credits. At 1 January 2024 the company had unused tax losses of 250,000,000 KRW arising in 2015 and 150,000,000 KRW arising in 2018. The company wants to know how much of the 400,000,000 KRW it can deduct in 2024, what happens to any balance, and how the answer changes if it had qualified as a small or medium enterprise. Its finance team also asks what would happen in 2025 if taxable income before loss deduction fell to 50,000,000 KRW.
1. Compute 2024 taxable income before and after the loss deduction, and the corporate tax and local income tax payable. Apply the 15-year carryforward and the 60% annual utilisation cap. Rates: 9% up to 200,000,000 KRW, 19% above; local income tax is 10% of corporate tax.
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Step 1 - tax adjustments. The fine is a non-deductible penalty, so add 20,000,000. Depreciation must be reduced to the tax amount, so add back 140,000,000 - 100,000,000 = 40,000,000. Taxable income before losses: 480,000,000 + 20,000,000 + 40,000,000 = 540,000,000 KRW.
Step 2 - cap. For a non-SME the annual loss deduction is limited to 60% of income before the deduction: 540,000,000 x 60% = 324,000,000 KRW.
Step 3 - allocation. Losses are used in chronological order. The 2015 loss of 250,000,000 is used in full; 74,000,000 of the 2018 loss is used; 76,000,000 of the 2018 loss remains and is carried forward (the 2015 loss is exhausted and, having arisen in 2015, would in any event expire at the end of 2030).
Step 4 - tax. Taxable income: 540,000,000 - 324,000,000 = 216,000,000. Corporate tax: 200,000,000 x 9% = 18,000,000; 16,000,000 x 19% = 3,040,000; total 21,040,000 KRW. Local income tax: 2,104,000 KRW.
2. How would the result differ if Hanlim qualified as a small or medium enterprise?
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The adjustments and the 540,000,000 KRW starting figure do not change. What changes is the utilisation cap: SMEs are not subject to the 60% limitation, so the full 400,000,000 KRW of losses can be deducted in 2024. Taxable income becomes 540,000,000 - 400,000,000 = 140,000,000 KRW, all taxed at 9% = 12,600,000 KRW, plus local income tax of 1,260,000 KRW. No loss remains to carry forward. The comparison shows why SME status is worth checking before accepting the 60% cap: here it saves 8,440,000 KRW of corporate tax and 844,000 KRW of local tax in 2024, at the cost of losing the 76,000,000 KRW shelter for future years.
3. Explain the treatment of the remaining 76,000,000 KRW if 2025 taxable income before loss deduction is only 50,000,000 KRW, and note any risk if the company later merges with another corporation.
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The 60% cap is recalculated every year, so in 2025 only 50,000,000 x 60% = 30,000,000 KRW can be deducted. Taxable income becomes 20,000,000 KRW and 46,000,000 KRW is carried forward. Because the 2018 loss expires 15 years after 2018, the remaining balance can be used up to the end of 2033. The company should model future profits, because a persistent low-profit pattern will leave losses unused until expiry.
If Hanlim merges with another company, the Corporate Tax Act restricts use of pre-merger losses. In a tax-qualified merger the surviving company's losses can generally be carried forward only in proportion to the net assets contributed, and loss carryforwards may be denied where the merger lacks a genuine business purpose. The 76,000,000 KRW balance is therefore at risk in any restructuring and should be quantified before signing.