Rent 2020: the choice between costs and expenses or 25 percent exempt income

In accordance with Article 336 of the ET, self-employed workers must choose between subtracting in their income tax return costs and expenses or 25% of exempt income.

In no case both benefits may be taken together in the income tax return for the taxable year 2020.

According to the new version of article 336 of the Tax Statute -ET-, modified by article 41 of Law 2010 of 2019, for purposes of establishing the net income of the general taxable year 2020, self-employed individuals must choose between taking in the income tax return the costs and expenses associated with their economic activity from fees or compensation for personal services or the 25% of exempt income provided in paragraph 10 of article 206 of the ET.

Thus, as a novelty for the income tax returns of individuals to be filed between August 10 and October 20, 2021 at the latest, the 25% exempt income will only be applicable to self-employed workers who hire or link for a term of less than 90 days less than 2 workers, provided that they have not opted to subtract the costs and expenses arising in the development of their activity (see numeral 2 of article 1.2.1.20.4 of Decree 1625 of 2016, replaced by article 1 of Decree 1435 of 2020).

This same precision is contained in article 1.2.1.1.20.5 of Decree 1625 of 2016, replaced by article 1 of Decree 1435 of 2020, which establishes that taxpayers who receive income considered as earned income from fees or compensation for personal services, obtained in the development of an independent professional activity, may subtract the costs and expenses that have causal relationship provided that the value equivalent to 25% of exempt income has not been subtracted.

Let us recall that, for taxable year 2019 returns, the rule allowed self-employed workers to take in their income tax return (form 210) both costs and expenses (see Ruling C-120 of November 14, 2018 and Ruling C-520 of November 5, 2019), as well as the exempt income of numeral 10 of article 206 of the ET. However, with the amendments made by Law 2010 of 2019, self-employed workers will no longer have both benefits and therefore the net income on which the income tax for the taxable year 2020 will be calculated will be increased.

An independent worker during 2020 obtained a total gross income of $59,400,000 ($4,950,000 monthly) for fees on which he made the respective social security contributions of $6,771,600. In the development of his income producing activity he incurred in costs and expenses in the amount of $10.000.000. This worker does not have dependents and the other exempt income and deductions contemplated in the norm are not imputable to him, with the exception of the 25% of exempt income indicated in numeral 10 of article 206 of the ET.

“the income tax of self-employed workers will increase depending on whether they choose to take in their income tax return the costs and expenses incurred during the taxable year or if they choose the 25% exempt income.”

Thus, we can observe how the income tax of self-employed workers will increase depending on whether they choose to take in their income tax return the costs and expenses incurred during the taxable year or if they choose the 25% exempt income, since this will directly affect the net income on which the tax will be calculated. Situation that if compared with the taxable year 2019 (see case 1) represents a significant decrease in the total net income on which the respective tax was determined.

Dian will control in form 210 the determination of the net income of self-employed workers.

By means of Resolution 000022 of March 5, 2021, the Dian issued form 210 for the filing of the income tax return of individuals for the taxable year 2020. Said form presents a completely new structure to the one contained in the previous form 210 corresponding to the 2019 tax period, given that now a special section called “income from fees and compensation for personal services subject to costs and expenses and not to the exempt income of numeral 10 of article 206 of the ET” was designed, in which the income received by independent workers (who have not hired 2 or more workers) who are going to request the appropriate costs and deductions and have waived the 25% exempt income must be registered.

On the other hand, self-employed workers who do not impute the costs and expenses associated with their activity in order to be entitled to the 25% exempt income of numeral 10 of article 206 of the ET, must register their income in the section corresponding to earned income in which it can be observed that the box alluding to “costs and deductions applicable” is not available.

Source: Actualícese