There are two broad kinds of tax returns in Japan: Blue returns (青色申告) and White returns (白色申告), and they apply both for individuals and companies.
Which is better, the Blue or White tax return?
In most cases, Blue returns are more advantageous. There are four benefits to having Blue filing status:
- Only those who file Blue tax returns may use special income deductions. Those that use double-entry bookkeeping can take a ¥650,000 deduction to their taxable income. Those that use single-entry bookkeeping can take only a 100,000 deduction to taxable income.
- Only those who file Blue tax returns may carryover losses to apply to future years’ income. For example, if your business has a net loss in year 1 and in year 2 the business made money, with Blue filing status you can use the loss in year 1 to reduce the taxable income in year 2.
- Only those who file Blue tax returns may pay a family member a salary and report that money as a business expense, thus reducing taxable income.
- Blue tax return filers can expense more fixed assets in the year of purchase than White return filers. Normally, with fixed assets that cost over ¥100,000 yen you must depreciate those assets over their useful life. For Blue tax return filers, this level is raised to ¥300,000.
What are the demerits of using the Blue return?
Those who file the Blue tax return must maintain proper accounting books. This includes saving receipts and maintaining records. White filers don’t have this requirement (although if they have over ¥3,000,000 a year then some simple bookkeeping is still required). However the benefits of using the Blue return usually far outweigh the time and effort required to maintain accounting records.
How do I choose Blue or White tax filing status?
White filing is the default status, so if you do nothing you are automatically considered a White-form filer. To be able to file the Blue tax form, you need to specifically apply for it. The document to request fill out is called 所得税の青色申告承認申請書 “Application Form for Approval to File Blue-Form Income Taxes Return”, and the official form can be found here.