ACCA Advanced Taxation (ATX) Practice Exam

What is the primary distinction in the carry forward of losses between a sole trader and a company?

1. Individuals can carry forward losses against any income

2. Companies can carry forward losses only against trading profits

3. Individuals can carry forward losses against income from any trade

4. Companies can carry forward losses against total profits

The correct answer is: Companies can carry forward losses against total profits

The primary distinction in the carry forward of losses between a sole trader and a company is that companies can carry forward losses against their total profits. This means that if a company experiences a loss in one accounting period, it can use that loss to offset profits in future periods, regardless of the source of those future profits—whether they come from trading, investment income, or any other sources. This characteristic aligns with how corporate losses are managed under tax regulations, allowing companies greater flexibility to manage their tax liabilities. In contrast, sole traders face restrictions on how they can utilize their losses. While individuals can typically carry forward business losses to offset future earnings from that specific trade, they can't apply those losses as broadly as companies can against total profits. This understanding is central to tax planning for both sole traders and corporations as they navigate their respective loss utilization strategies for optimized tax efficiency.