Summary: Businesses can extend the life of their accumulated losses by converting a company into a Limited Liability Partnership (LLP) under Section 72A(6A) of the Income-tax Act, 1961. This provision allows business losses and unabsorbed depreciation to be carried forward for 8 years post-conversion, offering significant tax savings. However, the Budget 2025 has proposed an amendment effective from 1st April 2025, limiting this benefit. After the deadline, the carry-forward period will start from the year of the original loss, not from the conversion year. To qualify for the exemption under Section 47(xiiib), the company’s turnover should not exceed ₹60 lakh in the past three financial years, all assets and liabilities must be transferred to the LLP, and shareholders must become partners in the same proportion. Any violation of the specified conditions will revoke the tax benefit. Given the impending changes, businesses looking to optimize tax planning and operational flexibility should finalize their LLP conversion before 31st March 2025 to secure the 8-year extension on business losses.
Why Convert to an LLP?
An LLP combines the benefits of a company (limited liability) with the flexibility of a partnership (lower compliance costs). Additionally, the conversion offers significant tax advantages, the most notable being the ability to carry forward and set off losses and unabsorbed depreciation of the erstwhile company against future profits of the LLP.
The 8-Year Lifeline for Losses
Under Section 72A(6A), upon conversion of a company into an LLP under Section 47(xiiib), the business losses and unabsorbed depreciation of the company can be carried forward for the next 8 years from the year of conversion, subject to the following conditions:
1. Eligibility for Exemption Under Section 47(xiiib):
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- All assets and liabilities of the company must be transferred to LLP.
- Shareholders of the company must become partners of LLP in the same proportion as their shareholding.
- The company’s turnover must not exceed ₹60 lakh in any of the last three financial years.
- No consideration (other than profit-sharing) should be received by the partners.
- The LLP should not be dissolved, or its partners should not change for at least 5 years.
- The aggregate of the profit-sharing ratio of the shareholders of the company in the LLP should not be less than 51 percent at any time during the period of 5 years from the date of conversion.
- The total value of the assets as appearing in the books of account of the company in any of the three previous years preceding the previous year in which the conversion takes place does not exceed Rs. 5 cr.
2. Continuity of Losses:
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- Business losses continue in the hands of the LLP.
- These can be set off against future profits for up to 8 years from the original year of loss.
- If any of the above conditions are violated, the benefit of carry forward will be revoked.
Why Act Before 31st March 2025?
The Budget 2025 has proposed an amendment to Section 72A(6A), effective from 1st April 2025, reducing this benefit for remaining period. The period of 8 years will start from the year of the incurrence of losses by the Company. This means that companies converting to LLPs after 31st March 2025 will no longer be able to carry forward business losses for another 8 years rather than for the remaining period only.
Thus, businesses looking to optimize their tax planning must act swiftly to take advantage of this provision before it is phased out.
Conclusion
The conversion of a company into an LLP is a once-in-a-lifetime opportunity to breathe new life into business losses while enjoying the operational flexibility and tax benefits of an LLP. With the upcoming change in tax laws from 1st April 2025, businesses must finalize their conversion before 31st March 2025 to secure the 8-year extension on their losses.
For businesses looking to maximize tax savings and future profitability, the time to act is now!
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The above comments do not constitute professional advice. It is advisable to seek professional guidance for accurate compliance of above mentioned tasks. The Author can be reached at rapg@rapg.in or visit our website www.rapg.in or call me- Mr. CA Neeraj Kumar on 9999836182. Our main aim is to provide best possible solution so that our client gets satisfied with quality services.
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