It is Possible to Pay Less Tax in 2024 Through Inflation Adjustment!

In this article, we will address the inflation adjustment of disposable products recorded in inventory. According to the provisions of Tax Procedure Law No. 213, inventories are valued based on their cost value. Stocks purchased by companies in previous years are recorded at various types of cost values.

Inflation adjustment is a correction process applied to financial statements that no longer reflect the real situation due to changes in the purchasing power of money, with the aim of ensuring that these statements present the actual financial reality.

According to the provisions of Tax Procedure Law No. 213, inflation adjustment is defined as “calculating the financial statement in terms of the purchasing power as of the date of the financial table.”

First, we would like to touch upon the tax impact of inflation adjustment for companies. The inflation adjustment for the year 2023, reflected in the 31.12.2023 balance sheets, will not have an impact on income/corporate tax, meaning that previous year profits arising from inflation adjustment will not be subject to tax, and previous year losses will be accepted as losses. The inflation adjustment for the year 2023 will not have any tax implications for that year.

However, in 2024, profits or losses arising at the end of the temporary tax periods or fiscal year will be calculated based on the results of the inflation adjustment, and the profits will be subject to income or corporate tax. Any losses calculated will be recognized as deductible in the financial profit/loss calculations.

In this context, an important point for businesses from a tax perspective is the following:

Assets subject to inflation adjustment in the balance sheet dated 31.12.2023 will be taken into account in 2024 with their adjusted values.

For example, let’s assume an inventory item recorded at a value of 100 TRY in the pre-adjustment balance sheet dated 31.12.2023 is revalued to 130 TRY after inflation adjustment. If that item is sold/used in 2024, the deductible cost amount will be 130 TRY. Therefore, inflation adjustment calculations made in the balance sheet dated 31.12.2023 will significantly affect profit/loss determination in 2024.

In this article, we will focus on the inflation adjustment of disposable products in inventory. According to Tax Procedure Law No. 213, inventories are valued at cost. Stocks purchased in past years by companies are recorded under different types of cost accounts, as shown below:

• 150 – Raw Materials and Supplies
• 151 – Semi-Finished Goods / Production
• 152 – Finished Goods
• 153 – Merchandise
• 157 – Other Inventories

Inflation adjustment for inventories can be made using the following methods:

For the 2023 year-end balance sheet:

• Actual Method
• Simple Average Method
• Inventory Turnover Rate Method

For 2024 adjustments:

• Actual Method
• Simple Average Method
• Moving Weighted Average Method

For inventory adjustment, the base date for inflation correction is the “date of registration in the books.”

Example Application:

In the balance sheet dated 31.12.2023 of SCRAP İLAÇ A.Ş., the disposable stock items are listed as follows:

Without inflation adjustment, these amounts would be expensed at their VAT-inclusive original cost.

If inflation adjustment is applied using the Actual Method, the adjusted values would be as follows (ROFM—non-real financing costs—are excluded from calculations):

As seen in the example above, if disposal were carried out without inflation adjustment, a tax advantage of 1,275,000.00 TRY would be realized based on the 5,100,000.00 TRY value. However, if disposal is performed after inflation adjustment, the tax advantage would increase to 2,761,186.63 TRY based on the adjusted value of 11,044,746.00 TRY.

Conclusion:
By performing inflation adjustment on disposable inventory listed in the 31.12.2023 balance sheets, businesses can deduct the adjusted values as expenses in 2024. Accordingly, if businesses remove disposable stocks from their inventories by 31.03.2024 (or by 30.06.2024 if the deadline is extended), they will have a legal right to deduct more expenses and pay less tax.

References:

• Tax Procedure Law No. 213 – Valuation Provisions
• General Communiqué No. 555
• Circular No. 165 under Tax Procedure Law