ACCA Advanced Taxation (ATX) Practice Exam

What does incorporation loss relief allow an individual to do?

1. Transfer provisions to another individual

2. Relieve losses against other businesses

3. Relieve remaining losses against income from a newly formed company

4. Claim additional losses as a tax refund

The correct answer is: Relieve remaining losses against income from a newly formed company

Incorporation loss relief is a tax provision that enables individuals who have transferred their unincorporated business into a new company to relieve any remaining trading losses. This relief is particularly valuable when an individual who previously operated their business as a sole trader or in a partnership incorporates that business into a limited company structure. Specifically, incorporation loss relief allows the individual to offset any unused trading losses incurred before the incorporation against future profits from the newly formed company. This effectively reduces the taxable income of the new company, providing significant tax benefits to the individual. This particular option accurately captures the essence of incorporation loss relief, highlighting its purpose in allowing individuals to lessen their tax burdens through strategic loss management following the transition from an unincorporated to an incorporated entity.