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Practical guide to 2020 Income Tax.

12. Provisions

The different types (normal and simplified) of the direct estimation method must be differentiated, since the latter (the simplified modality) has a specific treatment for these expenses in Personal Income Tax.

Normal modality

Regulations: art. 14 of the LIS .

The following expenses will be deductible under the provisions item:

  • Those corresponding to environmental actions when they correspond to a plan formulated by the taxpayer and accepted by the Tax Administration.
  • The expenses inherent to the risks derived from the repair and review guarantees will be deductible up to the amount necessary to determine a balance of the provision not higher than the result of applying the percentage determined by the proportion in which the outstanding guarantees were applied to sales at the end of the tax period the expenses incurred to cover the guarantees in the tax period and in the previous two in relation to sales with guarantees made in these tax periods were found. 

This same rule will apply to provisions for the coverage of additional expenses for sales refunds.

Newly created entities may also deduct the aforementioned allowances for risks derived from the repair and review guarantees by setting the percentage mentioned above, with regard to the expenses and sales made in the tax periods that have elapsed.

The following expenses will not be deductible under the provisions item:

• Expenses for provisions and internal funds for the coverage of contingencies identical or similar to those covered by the consolidated text of the Act Regulation of Pension Plans and Funds, approved by Royal Legislative Decree 1/2002 of 29 November (Article 14,1 of the Spanish Corporation Tax Act).

These expenses will be tax deductible in the tax period in which the benefits are paid. 

• Expenses relating to long-term staff remuneration through defined contribution systems or defined benefit (Article 14,2 LIS).

However, contributions from pension plan developers regulated in the consolidated text of the Pension Plans and Funds Regulation Act, as well as those made to corporate social welfare plans, will be deductible. Contributions to cover contingencies similar to those of pension plans will also be deductible.

See the comment on these contributions in this same Chapter in "Personnel expenses."

• The following expenses associated with provisions:

  1. Derivatives of implied or tacit obligations.
  2. Those concerning the costs of fulfilling contracts that exceed the economic benefits expected to be received from them.
  3. Restructuring derivatives, except if they refer to legal or contractual obligations and not merely tacit.
  4. Those relating to the risk of sales refunds.
  5. Personnel that correspond to payments based on equity instruments, used as remuneration for employees, and paid in cash.

Note: The expenses that, in accordance with the two sections above, have not been tax deductible, will be included in the taxable base of the tax period in which the provision is applied or the expenditure is allocated to its purpose.

Simplified modality

Regulations: Art. 30. Regulations on Personal Income Tax

All deductible provisions and expenses that are difficult to justify will be quantified exclusively by applying the percentage of 5% of 100 overall positive net yield (the positive difference between full income and other tax deductible expenses, including depreciation and amortisation), excluding this concept, the resulting amount cannot exceed 2,000 euros per year.

The percentage of 5 per 100 is applied to activity, but the maximum amount that can be deducted by the taxpayer in all its activities for this concept cannot exceed 2,000 euros.

In the case of joint taxation, the maximum limit of 2,000 euros is applied for all members of the family unit who determine the net return for a simplified direct estimate.

In the case of activities carried out through entities in the income allocation system, the deduction for deductible provisions and expenses of difficult justification will be applied individually by each taxpayer or partner, heir, co-owner or participant on the net yield of the corresponding economic activity depending on the percentage of the bank's participation, the limit of 2,000 euros is applied to this amount. However, if the taxpayer carries out other economic activities in a simplified direct estimate, the limit of 2,000 euros will be applied to the sum of the deductions corresponding to each of these activities, reducing the excess in proportion to the net yield of each of them.

Note: The percentage of 5 per cent for deductible provisions and expenses that are difficult to justify is incompatible with the application of the reduction for the financial year 100 of certain economic activities provided for in article 32,2 of the Personal Income Tax Act and 26,1 of the Regulation of the aforementioned tax, which is discussed below. Consequently, when the taxpayer chooses to apply the aforementioned reduction, the percentage of 5% for 100 and the other percentage will not be applicable.