Entrepreneurs that are not obligated to prepare a balance sheet at the end of the year must instead prepare an Einnahmenüberschussrechnung, or EÜR for short. But what exactly does the EÜR entail? Read on to find out what the EÜR encompasses, who may choose to prepare one and what should be kept in mind when doing so.
Accounting on an EÜR basis: The basics
The Einnahmenüberschussrechnung is a simplified type of profit calculation. In Austria, the EÜR is also called the Einnahmen-Ausgaben-Rechnung (which differs from the German EÜR in several aspects) or the 4/3-Rechnung. The 4/3-Rechnung has nothing to do with any sort of four-thirds calculation. It instead refers to Article 4(3) of the German Income Tax Act (Einkommensteuergesetz, or EStG), which defines the EÜR as a method with which taxpayers can subtract their operating expenses from their revenue to determine their profits.
The basis of the EÜR
The basis of the EÜR is the cash inflow and outflow principle. For this method of profit determination, all that matters are the actual amounts that flow in and out of the business’s bank accounts and the cash amounts that are payed or received. Unlike with double-entry bookkeeping, obligations that arise or are settled via services don’t matter when preparing an EÜR. This does mean, however, that any advance payments – ingoing or outgoing – are fully taxable.
Revenue minus expenses equals profit: EÜR profit calculations only take into account the amounts that are actually generated by your company. This profit becomes the decisive basis upon which your company is taxed (or how you, as a freelancer, are taxed). The amount of profit influences the following aspects:
- The amount of VAT to be paid to the tax office (Finanzamt)
- Advance VAT returns (Umsatzsteuer-Voranmeldungen)
- VAT returns (Umsatzsteuererklärung)
- The amount of income tax (Einkommensteuer) to be paid
- The amount of trade (Gewerbesteuer) and corporation tax (Körperschaftssteuer) to be paid
Dealing with VAT within the framework of the EÜR
VAT also plays an important role in the preparation of the EÜR. VAT paid by customers (7% or 19%) is accounted for as an individual item. Pre-paid input tax should be physically recorded (not included in your digital EÜR) as an expense item. The resulting payments to the tax office must also be accounted for as a unique operating expense item. VAT refunds are correspondingly recorded as income.
Input tax can be accounted for at the payment date according to the cash inflow and outflow principle or, alternatively, at the invoice date. Those considered small-scale entrepreneurs by Article 19 of the German VAT Act (Umsatzsteuergesetz – UStG) do not need to charge VAT on their invoices or differentiate between gross and net amounts. These small-scale entrepreneurs do not include unique expense items for VAT or for input tax.
Accounting in Germany: The basics
Who can choose to prepare an EÜR?
There are legal specifications as to who can choose to prepare an EÜR. Generally, anyone who is not obligated to prepare a balance sheet can submit an EÜR to the tax office. The amount of your business’s revenue determines whether or not you fall into that category – with the exception of freelancers. Being able to submit an EÜR instead of a year-end financial statement (Jahresabschluss) with a profit and loss statement (Gewinn- und Verlustrechnung – GuV) can be a helpful relief, especially for the self-employed.
Up to what amount of revenue can I submit an EÜR for my business, and with which legal company forms?
The following regulations allow self-employed entrepreneurs to submit an EÜR instead of a year-end financial statement:
- Businesses that are not registered in the commercial register/Handelsregister (sole proprietorships/Einzelunternehmen or GbRs, but not GmbHs, OHGs, KGs, UGs or AGs)
- Businesses that earn less than €600,000 in revenue or €60,000 in profits. If you exceed this limit, you’ll have to prepare a balance sheet.
- Freelancers can submit an EÜR, regardless of the amount of profit or revenue earned.
Specifics to consider when preparing an EÜR
- Businesses’ depreciable assets are amortised over the course of their useful lives (this tax depreciation is referred to in German as Absetzung für Abnutzung, or AfA).
- Only paid interest can be listed as an expense item (and only in the year of its outflow). Material earnings, like cash payments, are to be noted in the EÜR according to the point in time in which the value was actually received.
- Payments received as per loan agreements are not considered income, and outgoing repayments are not considered operating expenses.
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The EÜR and your tax return
The EÜR is vital for your Steuererklärung (tax return), especially for your Einkommensteuererklärung (income tax return) submitted at the end of the calendar year. Income tax applies to many sources of taxable income. It is therefore important to note that it isn’t just profit that is subject to income tax.
The following income sources, for example, are subject to income tax:
- Income from being an employee (Einkünfte aus nichtselbständiger Arbeit)
- Income from capital assets (Einkünfte aus Kapitalvermögen)
- Income from renting or leasing property (Einkünfte aus Vermietung und Verpachtung)
In order to determine the basis for taxation, these sources of income are taken into account when calculating profit with the EÜR. The total amount of income may be reduced by certain tax allowances. Ultimately, the total income amount is calculated. There is a minimum amount below which no income tax is paid at all – only the amounts exceeding that limit are taxed. For 2018, this limit was €9,000.
Next, the Finanzamt (tax office) deducts other expenses from the total income amount, such as:
- Special expenses (Sonderausgaben)
- Exceptional costs (Außergewöhnliche Belastungen)
- Tax benefits, eg property ownership (Steuerbegünstigungen, beispielsweise bei Wohneigentum)
Clearly, there are several income and expense items that play critical roles in calculating income tax. The most important of these is most likely the income earned through your self-employment, making the EÜR significant for your income tax return/Einkommensbesteuerung.
What is the difference between an EÜR and a balance sheet?
The main difference between the Einnahmenüberschussrechnung and Bilanzierung (balance-sheet-based accounting) stems from the cash inflow and outflow principle. For the EÜR, all that matters are the dates that cash amounts are paid or received – not the reason. If payment for a service from 2018 is received in 2019, then the payment only influences 2019. This also holds true for payments received in 2019 for services that will occur in 2020.
In most cases, the date of payment decides when your revenues and expenditures are taken into consideration for tax purposes. The EÜR provides an overview of the profit you earned, but it doesn’t contain any information about your or your business’s financial situation. Unlike an EÜR, a Bilanz (balance sheet) shows exactly what assets are available on any reported date.
Moreover, a balance sheet also shows how those assets are used and can be used to estimate the future flow of assets. These assets don’t have static value. Rather, they are divided into fixed and current assets, assets and liabilities (Anlage- und Umlaufvermögen, die Aktiva und die Passiva).
Depending on whether an entrepreneur applies debit or actual taxation (Soll-Versteuerung, Ist-Versteuerung), their balance sheet will report either invoiced charges or payments that have actually been collected. Entrepreneurs that may prepare an EÜR generally use the latter, benefitting from the simplifications involved.
The EÜR form and data transfer
The form for a standardised EÜR can be downloaded from the official website of the Bundesfinanzministerium (federal ministry of finance). The form for the previous year usually becomes available around the beginning of April.
If you can read German, you can take a closer look at the information you’ll need to provide when preparing an EÜR on the downloadable form above. It also explains why small-scale entrepreneurs with less than €17,500 in operating income may no longer submit a formless EÜR, which, up until the end of 2017, was previously allowed. Since January 2018, small-scale entrepreneurs and freelancers with low revenue must also submit the EÜR using the official system
Do I have to submit the EÜR electronically?
Article 60 of the Einkommensteuer-Durchführungsverordnung, or EStDV (an income tax implementation regulation) that an EÜR’s data must be submitted electronically. Only in certain cases of hardship can the EÜR be submitted as a hard copy. As of the beginning of 2018, you need an electronic tax signature in addition to proper accounting software. You can obtain a Steuersignatur, or a tax signature (the so-called ELSTER certificate) online on the ELSTER portal. This signature can be used with common accounting and tax software as well as within the official ELSTER Windows application. The tax office, however, strongly recommends the use of the online ELSTER portal.
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The change in legislation mentioned above voids the right of self-employed entrepreneurs with low income to prepare and submit a formless EÜR. This renders all EÜR templates invalid, as every entrepreneur who may submit an EÜR is now obligated to use the official form.
Can I alternate between using single-entry and double-entry bookkeeping?
Switching from double-entry bookkeeping to single-entry bookkeeping (as well as the other way around) is possible, but it does involve some effort. Entrepreneurs who previously submitted EÜRs can exceed the maximum amount of revenue or profit (that had freed them from the obligation to prepare a balance sheet) within a year. But instead of immediately switching to double-entry bookkeeping in this case, you should wait for an order from the tax office instructing you to submit a balance sheet. Even entrepreneurs who don’t exceed the revenue or profit limits can freely choose to submit a balance sheet, and they can do so as early as the next business year. It can be quite advantageous to opt to prepare a balance sheet, especially when applying for a loan or performing a close analysis of your business. However, there is significantly more effort involved in preparing a balance sheet than in carrying out single-entry bookkeeping.
Transitioning from double-entry to single-entry bookkeeping is also possible if you regularly fall below the profit and revenue limits. Here, you must also wait until the year after next; if you fall below the limit in 2018, you must wait until 2020 to be able to submit an EÜR.
How and when can I switch?
You can generally choose to switch at the end of the business year, applying the new method of profit calculation starting at the beginning of the new business year. Be ready to put in some effort here; depending on the change you’re making, you’ll have to prepare various documents:
- Switching from EÜR → balance sheets: For this switch, you’ll have to prepare an opening balance sheet that accounts for all asset values, including inventory. You’ll also have to prepare a reconciliation statement, as the two methods of profit determination differ systematically. By doing so, you can avoid doubling certain transactions or missing them altogether.
- Switching from balance sheets → EÜR: Here, you must prepare a closing balance sheet – your last ‘official’ balance sheet. A reconciliation statement is necessary here as well.
A reconciliation calculation or statement (Übergangsergebnis, or Überleitungsrechnung) is used to determine any losses or profits that occur as a result of changing bookkeeping methods. Like switching between debit and actual taxation, there is always the danger that certain transactions are doubled or even completely overlooked in future profit calculations. While entrepreneurs who prepare balance sheets must immediately report receivables once an invoice is issued, those who submit EÜRs do not have to report the transaction until payment is actually received.
Keep in mind, however, that once a switch is made, the new method must be practised for three years. Switching back earlier is not possible – even if you exceed or fall below the profit and revenue limits.
EÜRs for small-scale entrepreneurs: How can I get a small business status called the Kleingewerberegelung?
You can request Kleinunternehmerregelung (small business regulation) directly on your tax registration form that you receive after registering your trade. Simply check the appropriate box (line 7.3).