The tax plus-minus calculation

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The tax plus-minus calculation (variazioni in aumento e in diminuzione) is a key step in calculating Italian corporation tax (IRES). It explains why the profit shown in the annual financial statements does not automatically correspond to the amount on which tax is actually payable.

The starting point is the pre-tax profit determined under commercial law. This is then adjusted in accordance with tax regulations. Only then is taxable income derived, on which Italian corporation tax (IRES) is calculated after further deductions have been taken into account.

How does the plus-minus calculation work?

In simple terms, the calculation can be presented as follows:

Calculation step	Content
Accounting profit before tax as shown in the annual financial statements	Starting figure as per the profit and loss statement
+ tax additions	Expenses that are not deductible or only partially deductible, as well as taxable income not yet taken into account
− tax deductions	Tax-exempt or non-taxable income, as well as expenses that are additionally deductible or only now deductible
= tax-adjusted profit	Profit before loss set-off and further deductions

In a further step, tax losses carried forward, for example, can be taken into account, provided the relevant conditions are met.

For companies, the tax adjustments are shown in the RF section (quadro RF) of the Italian corporate income tax return (Modello Redditi SC).

Why are tax adjustments necessary?

Commercial law and tax law pursue different objectives. The annual financial statements are intended to provide as true and fair a view as possible of the company's assets, financial position and results of operations. Tax law, on the other hand, determines which income is taxable and which expenses are tax-deductible.

An expense may therefore be recognised in full under commercial law but only partially, or not at all, for tax purposes. Conversely, income may be included in the annual financial statements but not recognised, either in full or in part, for tax purposes.

A distinction is made between permanent and temporary differences:

Permanent differences are not reversed in subsequent years. These include, for example, non-deductible fines.
Temporary differences arise when items of income or expense are recognised in different periods for accounting and tax purposes.

Example of a tax addition

A company reports a pre-tax profit of €100,000 under commercial law. This includes expenses of €10,000 that are not tax-deductible.

€100,000 profit
+ €10,000 addition
= €110,000 taxable profit

Example of a tax deduction

A company reports a pre-tax profit of €100,000 under commercial law. This includes income of €5,000 that is not recognised for tax purposes.

€100,000 profit
− €5,000 tax deduction
= €95,000 taxable profit

Typical tax additions

Items that may increase the taxable profit include, in particular:

business expenses that are not tax-deductible or are only partially tax-deductible;
expenses for cars not used exclusively for business purposes: in principle, only 20 per cent is deductible, and upper limits on the acquisition costs recognised for tax purposes also apply;
expenses for cars made available to employees for mixed business and private use: in principle, 70 per cent is deductible;
landline and mobile phone costs: in principle, 80 per cent is deductible;
entertainment expenses, insofar as they do not meet the statutory requirements or exceed the applicable monetary limits. These limits amount to 1.5 per cent of the relevant turnover up to €10 million, 0.6 per cent for the portion between €10 million and €50 million, and 0.4 per cent for any amount above that;
hotel and restaurant costs, which are generally only 75 per cent deductible unless a specific provision applies;
provisions and write-downs not recognised for tax purposes;
depreciation and amortisation exceeding the amount permitted for tax purposes;
fines and tax penalties;
interest expenses that are not deductible in the relevant year;
other expenses subject to specific restrictions on tax deductibility.

Whether an addition is required, and to what extent, always depends on the nature of the expense, whether it was incurred for business purposes, and the applicable provisions.

Typical tax deductions

A reduction in the taxable profit may arise in particular from:

expenses that were not yet tax-deductible in a previous year and are now recognised for tax purposes;
income included in the annual financial statements but not taken into account, either in full or in part, for tax purposes;
additional tax depreciation or further deductions not already taken into account in the profit and loss statement — for example, the additional tax deduction of, in principle, 4 per cent of the severance pay amounts paid annually into supplementary pension funds or into the Treasury Fund of the NISF/INPS; for companies with fewer than 50 employees, the deduction is 6 per cent;
the tax-exempt portion of certain dividends or gains on the disposal of shareholdings, provided the statutory requirements are met.

Tax losses carried forward

Tax losses carried forward may reduce the final IRES tax base. Under Article 84 of the TUIR:

tax losses may be carried forward indefinitely;
their set-off is generally limited to 80 per cent of the taxable income for the relevant tax period;
losses from the first three tax periods following incorporation may be set off in full, provided they arise from a newly commenced productive activity.

In addition, special provisions apply, including those relating to restructurings and changes in shareholdings.

The plus-minus calculation and IRAP

The plus-minus calculation described here relates to the determination of taxable income for IRES purposes. Separate rules apply to the regional tax on productive activities (IRAP). The IRES adjustments cannot therefore be automatically carried over to the IRAP tax base.

Conclusion

The tax reconciliation forms the link between the annual financial statements and the determination of taxable income for IRES purposes. It ensures that expenses and income recognised under commercial law are correctly classified in accordance with tax regulations.

For companies, the correct treatment of expenses with limited deductibility, temporary differences and tax losses carried forward is particularly crucial. As deduction limits and formal requirements may change, the legal position applicable in the relevant tax year is always decisive for the specific calculation.