Chapter 4 · Week 4 — The D-03: From Accounts to a Tax Return
The D-03: From Accounts to a Tax Return
Reconciling accounting profit to taxable income: the four adjustment families, pool depreciation and carried-forward losses.
4 of 8 · 7 min
A profit-and-loss account and a tax computation are two different documents describing the same year. This week is the bridge between them — the single most valuable skill in business tax filing.
4.1 Accounting profit is not taxable income
┌──────────────────────────────────────────────────────────────┐ │ │ │ ACCOUNTING PROFIT what the accounts say you made │ │ (per your P&L, prepared under NFRS/NAS) │ │ │ │ + DISALLOWED EXPENSES │ │ things you deducted in the accounts that │ │ the Act does not allow [R] │ │ │ │ − ADDITIONAL TAX DEDUCTIONS │ │ things the Act allows that the accounts │ │ did not deduct (or deducted less of) [R] │ │ │ │ ± TIMING DIFFERENCES │ │ depreciation being the big one │ │ │ │ − LOSSES BROUGHT FORWARD [R] │ │ │ │ ═════════════════════════════════════════ │ │ TAXABLE INCOME what tax is actually charged on │ │ │ └──────────────────────────────────────────────────────────────┘
Every D-03 is this reconciliation. If you cannot explain the difference between your accounting profit and your taxable income line by line, the return is not ready to file.
4.2 The four adjustment families
┌────────────────┬──────────────────────────────────────────┐ │ PERMANENT │ Never deductible, ever. │ │ DISALLOWANCE │ Fines and penalties. Personal expenses │ │ │ run through the business. Expenditure │ │ │ the Act names as non-deductible. [R] │ │ │ → adds to taxable income permanently │ ├────────────────┼──────────────────────────────────────────┤ │ CAPPED │ Deductible, but only up to a limit. │ │ DEDUCTION │ Donations, entertainment, and other │ │ │ categories the Act caps. [R] │ │ │ → the excess adds back │ ├────────────────┼──────────────────────────────────────────┤ │ TIMING │ Deductible eventually, but in a │ │ DIFFERENCE │ different year. Depreciation is the │ │ │ main one: book depreciation out, │ │ │ tax depreciation in. │ │ │ → reverses over the asset's life │ ├────────────────┼──────────────────────────────────────────┤ │ CONDITIONAL │ Deductible only if a condition is met. │ │ DISALLOWANCE │ The cash-payment rule is the one that │ │ │ catches people: a payment above the │ │ │ threshold made in cash is disallowed │ │ │ even though the expense is real. [R] │ └────────────────┴──────────────────────────────────────────┘
4.3 Depreciation: the pool system
Nepal does not depreciate assets one by one for tax. Assets go into pools, and the pool is depreciated as a block. [R]
THE POOL MECHANIC ┌──────────────────────────────────────────────────────────┐ │ │ │ Opening pool balance │ │ + additions during the year │ │ − disposals during the year │ │ ═══════════════════════════ │ │ DEPRECIABLE BASE │ │ × the pool's rate [R] │ │ ═══════════════════════════ │ │ TAX DEPRECIATION for the year │ │ │ │ Closing pool = depreciable base − depreciation │ │ (carries into next year) │ │ │ └──────────────────────────────────────────────────────────┘
Worked example — book versus tax depreciation.
ILLUSTRATIVE. Substitute the pool rates in force. [R]
A company's plant pool:
Opening pool balance Rs 8,000,000
Machine purchased in the year Rs 2,000,000
Machine sold in the year Rs 500,000
──────────────
Depreciable base Rs 9,500,000
Pool rate (illustrative 15%) × 0.15
──────────────
TAX depreciation Rs 1,425,000
Closing pool Rs 8,075,000
Meanwhile the ACCOUNTS charged straight-line depreciation:
Book depreciation Rs 1,100,000
THE ADJUSTMENT ON THE RETURN
Add back book depreciation + 1,100,000
Deduct tax depreciation − 1,425,000
──────────────
Net effect on taxable income − 325,000
Taxable income is Rs 325,000 LOWER than accounting profit
this year — purely from a timing difference. Over the
asset's life the two converge to the same total. WHY THE POOL SYSTEM MATTERS FOR PLANNING
Because depreciation is computed on the POOL, an asset
bought late in the year still attracts a full year of
pool depreciation in many cases. [R]
base ──────────────────────────────────────►
▲ ▲
│ │
bought in bought in
Shrawan Ashad
(month 1) (month 12)
Both may land in the same pool at the same base.
Verify the rule before relying on it — but this is why
capital purchases cluster near year end.4.4 Losses carried forward
┌────────────────────────────────────────────────────────┐ │ │ │ Taxable income = current year profit │ │ − losses brought forward [R] │ │ │ │ Losses expire after a period the Act sets. [R] │ │ An expiring loss is worth using; a loss you let │ │ lapse is money burnt. │ │ │ └────────────────────────────────────────────────────────┘
Worked example — the loss schedule.
ILLUSTRATIVE, with a 7-year carry-forward assumed. [R] year profit/(loss) loss pool used remaining ────────────────────────────────────────────────────────────── 2078/79 (1,200,000) 1,200,000 — 1,200,000 2079/80 (400,000) 1,600,000 — 1,600,000 2080/81 300,000 1,600,000 300,000 1,300,000 2081/82 700,000 1,300,000 700,000 600,000 2082/83 1,500,000 600,000 600,000 0 ────────────────────────────────────────────────────────────── In 2082/83 the company earned 1,500,000 but pays tax on only 900,000, because 600,000 of old loss remained. THE DISCIPLINE: the loss pool is a schedule you maintain across years, not a number you remember. It has to tie to every prior return you filed.
4.5 The full D-03 computation
ILLUSTRATIVE, a trading company, FY 2083/84. [R]
── FROM THE ACCOUNTS ──────────────────────────────────
Revenue Rs 48,000,000
Cost of sales Rs 36,000,000
───────────────
Gross profit Rs 12,000,000
Operating expenses Rs 8,400,000
(of which: depreciation 1,100,000
donations 300,000
penalty 80,000
cash-paid expense 120,000)
───────────────
ACCOUNTING PROFIT Rs 3,600,000
── ADJUSTMENTS ────────────────────────────────────────
Add back: book depreciation + 1,100,000
Add back: penalty (never allowed) + 80,000
Add back: cash payment above the
threshold + 120,000
Add back: donation above the cap
(300,000 claimed, 200,000
allowed — illustrative) + 100,000
───────────────
Sub-total Rs 5,000,000
Deduct: tax depreciation − 1,425,000
───────────────
Adjusted business income Rs 3,575,000
Deduct: loss brought forward − 600,000
───────────────
TAXABLE INCOME Rs 2,975,000
── TAX ────────────────────────────────────────────────
Tax at the entity rate (illustrative
25%) [R] Rs 743,750
Less: TDS suffered on receipts − 180,000
Less: advance instalments paid − 500,000
───────────────
BALANCE PAYABLE Rs 63,750 THE RECONCILIATION, AS A PICTURE
Accounting profit 3,600,000 ████████████████
+ add-backs 1,400,000 ██████
− tax depn 1,425,000 ██████
− losses 600,000 ███
─────────
Taxable income 2,975,000 █████████████
Every one of those four movements must be explainable
and documented. That reconciliation IS the D-03.4.6 What the portal expects
BEFORE OPENING D-03 Return Entry ┌───────────────────────────────────────────────────────┐ │ [ ] Final accounts, signed off │ │ [ ] Audit report, where audit is required [R] │ │ [ ] Depreciation schedule by pool, tying to the │ │ closing balances of last year's return │ │ [ ] Loss schedule, tying to every prior return │ │ [ ] The adjustment list, each item with a reason │ │ [ ] TDS certificates, reconciled to the system │ │ [ ] Instalment vouchers, confirmed in Payment │ │ Voucher Search │ └───────────────────────────────────────────────────────┘ The two "tying to" lines are the ones that fail. Your opening pool balance this year MUST equal your closing pool balance last year. If it does not, one of the two returns is wrong and IRD can see both.
Formulas from this week
Taxable income
= accounting profit
+ disallowed expenses
+ capped-excess amounts
+ book depreciation
− tax depreciation
− losses brought forward [R]
Pool depreciation
depreciable base = opening pool + additions − disposals
depreciation = depreciable base × pool rate [R]
closing pool = depreciable base − depreciation
Capped deduction
allowed = MIN(claimed, cap)
add back = claimed − allowed
Loss utilisation
used this year = MIN(loss pool, current year profit)
remaining = loss pool − used
Balance = tax − (TDS + instalments + prior payments)What you should be able to do now
- Explain why accounting profit and taxable income differ, and reconcile the two line by line.
- Classify any adjustment into the four families and say whether it reverses.
- Compute pool depreciation and the closing pool balance.
- Explain the difference between book and tax depreciation as a timing difference that nets to zero over an asset's life.
- Maintain a loss schedule across years and compute utilisation.
- Produce a complete D-03 computation from a set of accounts.
- Say why opening balances tying to last year's closing balances is the first thing a reviewer checks.
Next week: the estimated return and advance tax — paying before you know what you owe.
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