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Corporate finances can be a labyrinth, especially when it comes to complying with tax regulations in Mexico. For entrepreneurs and business leaders, it’s crucial to understand the key aspects that affect the financial health of their companies. One of these aspects is the annual adjustment for inflation, a topic that, though technical, has a significant impact on business operations, particularly for those who are new to the Mexican market.

What is the Annual Adjustment for Inflation?

The annual adjustment for inflation is a mechanism that evaluates how price changes affect a company’s finances over time. In simple terms, it measures how inflation has influenced the value of the money that the company owes or is owed.

Credits and Debts: What Do They Mean for Your Business?

Credits: Payments you receive from third parties due to previous commercial transactions.

Debts: Financial obligations that the company has pending to pay.

The Importance of the Annual Adjustment for Inflation for Your Company

Corporations must carry out this annual calculation to determine their tax liability and the corresponding Income Tax (ISR). This process can result in two possible scenarios:

Accumulable Adjustment: Occurs when debts exceed credits. The company benefits as inflation decreases the real value of the debt, resulting in additional income for the tax declaration.

Deductible Adjustment: Occurs when credits exceed debts. Inflation reduces the real value of the money to be received, allowing the company to register a tax deduction.

Practical Calculation Example

Let’s imagine that your company has annual credits of 500,000 MXN and debts of 300,000 MXN. The adjustment calculation is based on the difference between these amounts and the annual inflation rate, which for this example, let’s assume is 5%.

For a Deductible Adjustment: The difference of 200,000 MXN is multiplied by 5%, resulting in a deductible adjustment of 10,000 MXN.

For an Accumulable Adjustment: If the situation were reversed, with debts greater than credits, the same calculation would apply, but the result would be considered additional income subject to ISR due to inflation.

Concluding Remarks

It’s important to highlight that this adjustment is a standard practice in Mexico and seeks to accurately reflect the impact of inflation on financial statements, promoting tax fairness. Companies are encouraged to review their balances before year-end to determine the potential impact of the inflation adjustment.

Need Assistance?

At Mextax, we offer specialized services to guide you through these and other tax complexities. Feel free to contact us for expert and personalized advice for your business.