Blue return system

1 Overview of blue return system

In Japan, a self-assessment system has been established for income taxes, where taxpayers correctly calculate the income amount and tax amount according to the applicable tax law and pay tax by themselves.

In order to correctly calculate and declare the amount of income generated during the year, it is necessary to record the status of daily transactions related to the income and necessary expenses, as well as to retain the documents created and received for the transaction.

For those who maintain a certain standard of bookkeeping practice and make correct declaration based on the bookkeeping, there is a blue return system where filers can receive advantageous treatment in the calculation of income.

Those who have real estate income, business income, and timber income can file the blue return.

2 Application procedures for filing the blue return

1. (1) Principle
   New applicants for the blue return must submit the "Application for Filing the Blue Return" to a District Director of Tax Office with jurisdiction over the location of their address by March 15 of that year.
2. (2) In the case of commencing new business (for operations started after January 16 of that year)
   Please submit the "Application for Filing the Blue Return" to a District Director of Tax Office with jurisdiction over the location of your address within two months from the date of commencement of operation.
3. (3) In the case of succeeding operation by inheritance
   If the operation was succeeded after January 16 of that year, please submit the "Application for Filing the Blue Return" to a District Director of Tax Office with jurisdiction over the location of your address within two months from the date of succession of operation.
   However, if the person you inherited from filed a blue return, please submit the "Application for Filing the Blue Return" to a District Director of Tax Office with jurisdiction over the location of your address within four months following the day on which the taxpayer learned about the beginning of inheritance, which is the due date for submitting the quasi-final tax return due to the decedent's death (or by the date deemed to have been approved for the blue return, if the due date comes after the said date).
   The table below summarizes the above explanations.

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3 Book and record keeping by blue return filer

In principle, books for blue return should be kept based on regular bookkeeping that enables a filer to prepare a balance sheet and income statement at the end of the year. However, simple bookkeeping using books such as cash book, accounts receivable ledger, accounts payable ledger, expense ledger and fixed asset ledger is also permitted.

These books and documents should be retained for seven years in principle, except for some documents which only need to be retained for five years.

4 Benefits of blue return

The major benefits of the blue return are as follows:

1. (1) Special exemption for blue returns
   Blue return filers who are engaged in business that generates real estate income or business income shall, in principle, receive a deduction of up to 650,000 yen through such income if they keep books on the transactions related to such income based on the principle of regular bookkeeping (generally, bookkeeping by double entry) and submitted the balance sheet and income statement prepared based on the books as attachment to the final tax return within the statutory tax return due date.
   In addition, other blue return filers shall receive a deduction of up to 100,000 yen through real estate income, business income and timber income.
2. (2) Salary payments to family employees exclusively engaged in the business of blue (income tax) return filers
   The salary payments for spouse or other relatives, who live in the same household as the blue return filer and who is 15 years old or older and exclusively engaged in the business of the blue return filer, can be included as necessary expenses as long as the amount is reasonable as compensation for full-time employees and within the range of the amount stated in the notification filed in advance.
   It should be noted that family employees who are exclusively engaged in the business of blue return filers and receive a salary are not eligible for exemption as spouse or dependents.
3. (3) Allowance of uncollectible receivables
   Blue return filers who are engaged in business that generates business income can record the estimated amount of loss in accounts receivables and loans arising from the execution of the business as allowance of uncollectible receivables. If the amount is less than 5.5% of the total book value of the loan at the end of the year, it can be treated as necessary expense. However, in the case of financial business, 3.3% is applied instead (collective assessment).
   With respect to the estimated amount of loss due to certain reasons such as bad debts or the like, it can be recorded as allowance of uncollectible receivables up to the limit of the respective reason (individual assessment). In such a case, loans that form the basis of the calculation of the amount to include in the necessary expenses are excluded from the total amount of book value in the collective assessment.
4. (4) Carry-over and carryback of net losses
   When there is a loss (deficit) in business income, etc., and if there is an amount that cannot be fully deducted even if provision for aggregation of profits and losses is applied (i.e., net loss amount), such loss may be carried over for the next three years from the following year and deducted from the income amount for each respective year.
   In addition, if the taxpayer had filed the blue return in the preceding year, instead of carrying over the net loss, he/she can carry back such loss to the year preceding the year in which it occurred, and receive income tax refund for the previous year.

出典：国税庁ホームページ（http://www.nta.go.jp/english/taxes/individual/12010.htm）