Income taxes: a mini guide to becoming an expert accountant

In Italy, the tax system provides for numerous direct taxes, including income taxes. If an individual or company performs a service or work, it must pay a portion of its proceeds to the state.

But how to make your way through this tangled maze of net deductible charges, consolidated income tax text, and single certification?

Appvizer is here to throw you the Ariadne's thread that will point you to the exit. We will try to clarify what income taxes are, how they are calculated, and which categories are affected by the different tax charges.

See all software Accounting

Income taxes: definition

In the Italian tax model, there are three types of income taxes:

• IRPEF
• IRES
• IRAP

These income taxes are recorded among the items in the income statement and correspond to the taxes that the state mandatorily requires from the working citizen (employee, freelancer or company owner).

These income taxes are calculated on taxable income, i.e., pre-tax gross income (the difference between revenues and expenses in the income statement) from which related tax changes have been subtracted or added to the balance sheet.

IRES

Definition

IRES (an acronym for Corporate Income Tax) is an income tax that all businesses are obligated to pay for income produced. This type of tax is the same for all companies regardless of the income generated.

Historically, the taxable rate was 27.5 percent, but in 2017 the stability law made a change, lowering the rate to 24 percent.

So if a company generates income equivalent to 50,000 euros or 2 million, it will have to pay the same IRES rate, since this tax does not provide for the implementation of brackets based on income.

How is payment made?

IRES payment is made through the F24 form available online. It is never paid in a lump sum, but through a system of down payment and balance.

It is, therefore, required to be paid in two installments on account and a final balance. The tax codes are as follows:

• I installment of the down payment: tax code 2001;
• II installment of the down payment: tax code 2002;
• Balance: tax code 2003.

The down payment is usually paid in installments in two payments, but if the amount to be paid is less than 258 euros, then it must be paid in one installment under " tax code 2002."

The advance payment for this income tax corresponds to the previous year's IRES. If in 2020 your company paid IRES of 2000 euros to the Internal Revenue Service, the advance payment for the year 2020 will be 2000.

How is the tax base calculated?

We know that the IRES rate is raised to 24% of income. But how do we calculate the tax base from which to deduct this income tax?

We must remember that we cannot proceed to the simple difference between income and expenses. In fact, not all expenses are deductible at 100% of income, but at a lower percentage. For example, only 20% of fuel expenses can be deducted.

The IRES tax base is calculated from the annual financial statements and more specifically from:

Pre-tax income (gross operating profit from the income statement)

+ Increases;

- Decreasing variations;

- Prior losses (from the prior year's financial statements).

= Taxable gross profit => IRES tax base.

If we were able to calculate the taxable base for this income tax, identifying the amount to be paid to the Internal Revenue Service proves straightforward, as it is equivalent to 24%.

If our taxable income rises to 100,000, the IRES to be paid is equivalent to 24,000 euros.

We will need, afterwards, to record this figure under item E of the income statement.

IRPEF

Definition

The 1973 tax reform gave birth to this income tax, namely the Irpef (acronym for Tax on the Income of Individuals).

This tax, unlike Ires, is aimed primarily at individuals, but indirectly companies pay it through shareholders.

Residents of Italy pay based on goods produced on Italian soil or abroad. Nonresidents, on the other hand, pay for income generated on Italian soil.

The Internal Revenue Service collects a total irpef of about 180 billion euros annually, about ⅓ of total tax revenue, making this tax one of the most important.

How is the Irpef calculated?

Irpef, unlike Ires, is a progressive income tax. This means that the rate changes according to the ability to pay that the individual generates each year. It is a tax, therefore, based on the income bracket system.

The amount to be paid to the Internal Revenue Service thus results from the sum of different factors:

• the calculation of increasing rates through the income bracket system
• the possible existence of income deductions
• the presence of tax deductions

For example, an employee whose annual income corresponds to 20,000 will have to pay a tax that amounts to about 17 percent percent. A self-employed person who generates an income of 50,000 will have to pay a figure of about 30 percent.

Exceptions to the payment of Irpef

The personal income tax irpef is a tax that must be paid every year. However, what is called the " No tax area" is the exception to paying Irpef. This term denotes the non-technical name for the income bracket to which a tax equal to zero corresponds.

This exception is not regulated by law, but results from the presence of the various deductions for employment or pension or freelance work. These deductions follow a decreasing system based on income.

Therefore, the no tax area changes according to the type of worker:

• 8,145 euros for employees,
• 8,130 euros for retirees,
• 4,800 euros for the self-employed.

The no tax area is also determined according to the type of household and family loads. For example, for a single-income family consisting of two parents and two children, the no tax area is around 16,340 euros.

However, the elimination of this income tax involves additional taxes at the regional and municipal levels.

See all software Accounting

IRAP

Definition

IRAP (acronym for regional tax on productive activities) is a tax that is calculated based on the value of production generated by businesses.

In Italy, this income tax was introduced during the Prodi government by Finance Minister Vincenzo Visco through Legislative Decree 446/199.

The Irap tax can be considered in its own right a proportional type of tax, calculated on the basis of the annual revenue generated by a company. Thus the tax base to which this proportional system is applied is exactly the difference between a company's revenues and costs, related to its core business.

What are the rates?

Since IRAP is a regional tax, in order to find out its rate, interested parties must apply to the relevant region.

The base rate has been set nationally at around 3.9 percent, but each region has the option to decide on a higher or lower rate by one percentage point based also on different types of businesses.

For whom is it mandatory?

Which entities are obligated to make payment of this tax? Updated to 2020, the list of categories is as follows:

• IRES taxpayers
• partnerships and equivalent entities
• individual business entrepreneurs
• exercising arts and professions, including in associated form
• public administrations.

Which categories are exempt?

1. Holders of agrarian income.The 2016 Stability Law repealed the part of the IRAP decree concerning entities operating in the agrarian sector. So IRAP exemption is enjoyed by actors in the agricultural and fishing sector, whether they are sole proprietorships, partnerships and noncommercial entities or corporations.

2. Minimum taxpayers under the flat-rate scheme. Individuals engaged in a commercial business activity or professions that fall under the tax-advantaged regime for young entrepreneurs and workers considered to be in mobility.

3. Door-to-door salespeople.Those engaged in door-to-door sales do not have to pay IRAP tax, as they are already obliged to pay withholding tax.

Why was it established?

In Italy, the income tax for productive activities Irap was established to subsidize through a regional tax the National Health Service.

Regarding the applicability of the tax, the Italian government decided in Article 2 of Legislative Decree 446/1997 that the requirements guiding the principles of Irap are as follows:

-habituality: the activity of the enterprise must be carried out continuously

-autonomy: those subject to this tax must prove that their activity has an organized structure in the form of a company. The self-employed and entrepreneurs are, therefore, not obliged to pay this income tax.

Do you see the light at the end of the maze? We hope we have been clear and precise. But if you still have any doubts, please feel free to post them in the comments.