TAXES | ENTREPRENEURSHIP

What is a provisional tax assessment?

Table of contents

What exactly is a provisional assessment? We explain it to you. Read more and find out what you can do with it.

A provisional tax return is an estimate of the tax you have to pay or get back for the current tax year. A provisional assessment makes it possible to spread out the result of your tax return over the whole year. Without a provisional assessment, your refund or tax liability can only be processed after the tax year has already expired, namely when you have filed your tax return.

Because of this reason, many people choose to apply for a provisional assessment so they can spread their refund or debt over the entire year.

Provisional tax assessment is based on estimates

To receive a provisional assessment you will, in most cases, have to file a provisional tax return. This tax return works similarly to the income tax return you file annually. You will have to report components such as your income and mortgage interest payable, for example. The main difference, however, is that in the provisional tax return you obviously cannot declare the actual data. This is because the year is still in progress, so you do not have the complete data. It is for this reason, that in a provisional return, you give estimates of your tax position. Based on these estimates, the tax authorities will then calculate your expected refund or payable amount. This amount will then have to be paid in monthly installments.

Preliminary assessment to be paid

Many entrepreneurs choose to file a preliminary tax return. Entrepreneurs, of course, do not work as employees, which also means that taxes are not withheld for their income throughout the year, as they are for employed people. As a result, without a preliminary assessment, entrepreneurs face relatively large amounts to pay after filing their returns. To make the satisfaction of these payments more feasible, we generally advise business owners to file a provisional return.

When preparing these returns, we estimate profits liberally. In all probability, this will result in a slight overpayment, but this also ensures that the business owner does not underpay, which would result in an additional amount to be paid, when the actual return is filed.

Provisional assessment for a refund

Another thing we encounter a lot as advisors is clients who want to apply for provisional assessments because they are expecting a refund. Usually these are people who have recently purchased a home. As an owner of your own home, you can take advantage of some tax benefits. One of these tax benefits is the mortgage interest deduction. This allows you to deduct the mortgage interest you paid from your income. This reduces your income and therefore your tax payable.

As a result, new homeowners generally receive fairly generous refunds. Many of them wish to receive their refunds during the year, rather than having to wait until the final return is processed. Also, the amount to be received coming in each month helps in significant measures with meeting their mortgage obligations.

With these provisional returns, we still make estimates. In contrast to the preliminary returns for entrepreneurs, we underestimate here. This ensures that we do not claim more than the client is entitled to and again prevents the client from having to pay an additional amount as a result of the final return.