28. Reduction Entry (Asshuku Kicho) or Deferred Tax on Property / Like-Kind Exchanges 圧縮記帳

圧縮記帳について英語でまとめました（国税庁サイト）。

An overview of "reduction entry (asshuku kicho)," i.e., deferral of tax on capital investment grants or like-kind exchanges in Japan, is as described below. See this post for more about Japanese tax and accounting:

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I. Definition of reduction entry

"Reduction entry" is Japanese tax treatment that defers taxes, such as the following. The basis for depreciation, or the cost for transfer, of an asset subject to reduction entry is book value reduced by the entry as described below: 

• Tax on government grants for capital investment - Reduce the value of an asset acquired using such a grant by the amount of the grant and deduct the same amount from taxable income.    
• Capital gains tax on like-kind exchanges - Reduce the value of an asset acquired through a like-kind exchange by the amount of the capital gain and deduct the same amount from taxable income. 

II. Requirements for reduction entry  

The key requirements for reduction entry are the following:

1. Treat the amount of the grant/gain in either of the following methods: 

• Direction deduction - Recognize the amount of the grant/gain as a tax loss and deduct the amount directly from the tax book value of the asset.
• Indirect deduction - Establish a reserve of the amount of the grant/gain by debiting retained earnings by the same amount for accounting purposes. For tax purposes, expense the reserve through amortization over its useful life.

       2.  Attach a relevant schedule for reduction entry to the final tax return.  

Click HERE for the explanation of "reduction entry (asshuku kicho)" in Japanese.  

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