Viv starts a new business on 1 February 2014 and prepares accounts for the 11 months up to 31 December 2014, showing a profit of €10,000. Viv's accounts for the year to 31 December 2015 show a profit of €15,000 and those for the year to 31 December 2016 show a profit of €20,000.
Viv’s profits are tax free up to the cap of €40,000 x (11/12) = €36,667, meaning the full €10,000 of profit is relieved from IT.
PRSI and USC will apply to the profits of €10,000 at the relevant rates.
As Jan's profits have not surpassed the €40,000 cap, the full €15,000 is relieved from Income Tax.
PRSI and USC will apply to the full profits of €15,000 at the relevant rates.
Calculating the months left: 24 - 11 [months claimed in year 1] - 12 [months claimed in year 2] = 1
As one month of year 3 is within the first 24 months, then the cap for that month which can be relieved from IT is €40,000 x (1/12) = €3,333.
To compare the actual profits with the cap, calculate the profit for that month: €20,000 x (1/12) = €1,667.
Viv can therefore claim relief against her profits of €1,667 in year 3, leaving €18,333 taxable. This represents the amounts of profits earned from February to December 2016 and therefore outside of the 24-month period to which the relief applies.