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Practical Income Manual 2021.

12. Provisions

It is necessary to differentiate between the modalities (normal and simplified) of the direct estimation method since the latter (the simplified modality) has a specific treatment for these expenses in Personal Income Tax .

Normal mode

Regulations: Art. 14 of the LIS

The following expenses will be deductible for the concept of provisions:

  • 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 revision guarantees will be deductible up to the amount necessary to determine a balance of the provision not greater than the result of applying to sales with guarantees alive at the conclusion of the tax period the percentage determined by the proportion in which the expenses incurred to meet the guarantees had been found in the tax period and in the two previous ones in relation to the sales with guarantees made in said tax periods. 

This same rule will apply to provisions to cover accessory expenses for sales returns.

Newly created entities may also deduct the provisions mentioned above for risks derived from repair and revision guarantees, by setting the percentage referred to therein, with respect to the expenses and sales made in the tax periods that have elapsed.

The following expenses will not be deductible for the concept of provisions:

• Expenses for provisions and internal funds to cover contingencies identical or analogous to those that are the subject of the consolidated text of the Law on the Regulation of Pension Plans and Funds, approved by Royal Legislative Decree 1/2002, of 29 November (Art. 14.1 LIS ).

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

• Expenses related to long-term remuneration to personnel through defined contribution or defined benefit systems (Art. 14.2 LIS ).

However, the contributions of the promoters of pension plans regulated in the consolidated text of the Law on the Regulation of Pension Plans and Funds, as well as those made to pension plans, will be deductible ## business social. Contributions to cover contingencies similar to those of pension plans will also be deductible.

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

• The following expenses associated with provisions:

  1. Those derived from implicit or tacit obligations.

  2. Those concerning the costs of compliance with contracts that exceed the economic benefits expected to be received from them.

  3. Those derived from restructuring, except if they refer to legal or contractual obligations and not merely tacit ones.

  4. Those related to the risk of sales returns.

  5. Personnel payments that correspond to payments based on equity instruments, used as a remuneration formula for employees, and are paid in cash.

Note: Expenses that, in accordance with the two previous sections, would not have been tax deductible, will be integrated into the tax base of the tax period in which the provision is applied or the expense is used for its purpose.

Simplified mode

Regulations: Art. 30.2 Regulation Personal Income Tax

The set of deductible provisions and expenses that are difficult to justify will be quantified exclusively by applying the percentage of 5 percent on the positive net return on a general basis (the positive difference between full income and other tax-deductible expenses including depreciation), excluding this concept, without the resulting amount exceeding 2,000 euros per year.

The 5% percentage is applied activity by activity, but the maximum amount that the taxpayer can deduct in all their activities for this concept cannot exceed 2,000 euros.

In the case of joint taxation, the maximum limit of 2,000 euros applies to all members of the family unit who determine the net income by simplified direct estimation.

In the case activities carried out through entities under the income attribution regime the deduction for deductible provisions and expenses that are difficult to justify will be applied individually by each taxpayer or partner, heir, community member or participant on the net performance of the economic activity that corresponds to him based on his percentage of participation in the entity, applying the limit of 2,000 euros on said amount. Now, if the taxpayer develops other economic activities in simplified direct estimation, the limit of 2,000 euros will be applied to the sum of the deductions corresponding to each of said activities, reducing the excess proportionally to the net income of each of them. .

Note: The 5% percentage for deductible provisions and expenses that are difficult to justify is incompatible with the application of the reduction for the exercise of certain economic activities contemplated in article 32.2.1 of the Personal Income Tax Law and 26.1 of the Regulation of the aforementioned tax, which is discussed later. Consequently, when the taxpayer chooses to apply the aforementioned reduction, the 5 percent percentage will not be applicable and vice versa.