If you are starting a sole proprietorship in Japan, you may already have come across a system called the “blue return” (aoiro shinkoku). The name — sometimes rendered literally in English materials as blue return — gives newcomers no clue as to what it is. In substance, it is a filing system under which you receive tax benefits in exchange for keeping your books to a certain standard. There are two ways to file: the blue return, and everything else (the white return). Which one you file under is the business owner’s own choice.
The four benefits of blue return status
The foundation of the blue return is bookkeeping. You are required to keep books to a defined standard, such as double-entry bookkeeping, and to retain the underlying records. In exchange, there are four main benefits.
First, the special deduction for blue return. On conditions including keeping books by double-entry bookkeeping, attaching a balance sheet and income statement, and filing by the deadline, you can deduct up to ¥650,000 from income (electronic filing or electronic book retention is required for the full amount; otherwise ¥550,000, or ¥100,000 for simplified bookkeeping).
Second, the carryover of losses. A net loss arising in a loss-making year can be carried forward for the following three years and set against income in profitable years. For businesses where losses tend to come first in the start-up phase, whether or not this carryover is available can shape several years of tax bills.
Family salaries and immediate expensing
Third, salaries paid to family. Where a spouse or relative who shares your household works exclusively in the business, salaries paid within the notified range (blue return family-employee salary) can be deducted as necessary expenses. Under the white return, only a fixed deduction is available (up to ¥860,000 for a spouse), so for those running a business with family, the practical difference is substantial.
Fourth, immediate expensing of small assets. Equipment and similar assets with an acquisition cost of less than ¥400,000 (less than ¥300,000 for assets acquired on or before March 31, 2026) can, within an annual limit, be expensed in full in the year of purchase.
A worked example of the saving
One worked example of the effect (assumptions: the ¥650,000 special deduction is available in full; the taxpayer’s income tax bracket is 10% and the resident tax rate is 10% — two separate taxes, each calculated on its own; the special reconstruction income tax is ignored). Income tax falls by ¥650,000 × 10% = ¥65,000, and resident tax by a further ¥650,000 × 10% = ¥65,000 — a combined saving of roughly ¥130,000. As for the return on the effort of keeping proper books, that is not a small amount.
Application deadlines for blue return approval
To receive these benefits, an application must be made in advance. To choose the blue return, you file an application for approval with the tax office. The deadline is within two months of opening in the case of a newly opened business; otherwise, it is March 15 of the year for which you wish to start filing blue — the same date as the filing deadline for the previous year’s return. Miss the deadline, and the blue return is unavailable for that year.
With accounting software, preparing double-entry books is no longer difficult even without bookkeeping knowledge. We recommend filing the application for blue return approval together with your notification of business opening. (See our note: Foreign Freelancers and Japan’s Invoice System.)
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