Can sole traders retain earnings to the next tax year without paying income tax in Ireland?

Question

Let's say you start a sole trader business in Ireland (year 2022) and you invest €0 into the business.

It goes well and you make €1,000,000 within the first year.

You decide to expand your business and there is going to be a business expense of €1,000,000 to rent out office space.

This means your net profit for the year is €0, meaning you pay no taxes.

However, let's imagine that you actually decide to wait until January 31st 2023 before renting out this new office space.

This happens to just barely pass the tax year boundary.

Must you suddenly pay income tax on this €1,000,000 (which is roughly 50% in Ireland or €500,000)?

Do you now have to get a loan of €500,000 to afford these office premises for the next year?

Or is there a way of holding money across the tax year to cover a future business expense, as to not pay tax on this?

Similarly, what happens if you hold this business capital in the form of some other asset, not money? Could you buy an asset before the tax year ends and sell it afterwards to avoid this tax?

Answer 1

Unless the tax law allows claiming prepayment, you pay the same tax either way

It also makes no difference if you are a sole trader or a company (except for the rate).

So you made a taxable profit in 2021 and rented a building for use in 2022 - that rent is tax deductible for profits in 2022, not 2021. Some jurisdictions allow deductions for prepayments of things like rent, loans, insurance premiums etc. but only for next year’s expenses - if you pay next year’s rent you can claim it this year but if you pay 5 years rent you can only claim next year’s portion. I don’t know if Ireland is one of those.

It doesn’t matter what form the profit is held, the tax is still payable. So, if you invest too heavily in stock, or motor vehicles or anything else, you might find yourself short of cash when the taxman comes calling.