Contents
- Key terms
- What can you deduct as business expenses?
- Using depreciation properly
- Making use of flat-rate tax allowances
- Using the investment deduction amount
- What are the typical costs that are tax deductible?
- Want to know more about accounting rules?
Some German tax terminology
Selbstständige (the self-employed) in Germany can benefit from many tax reductions (Steuerminderungen), provided that the amounts are stated at the appropriate place in the tax declaration (Steuererklärung). To get through the financial year with the best possible tax advantages, you not only have to keep all the receipts (Belege) of your purchases, but deploy the right flat-rate expenses (Pauschalen) at the right time.
What can you deduct as business expenses?
If you are planning new purchases, you should consider in advance whether you can offset acquisition costs (Anschaffungskosten) for tax purposes. For acquisitions that you theoretically could also use privately, it must be provable that you use them in the business – a relationship to work activities must be made clear. Most importantly, you need to collect and organise every document – because without proof, it’lll be difficult to deduct anything at all. If you want to deduct cash-paid goods for tax purposes, you must provide proof. In the case of higher amounts, which are paid in cash, it’s also not uncommon for the tax office to postpone or simply deny the tax rebate.
Using depreciation properly
Before you start incurring business expenses (Betriebsausgaben), consider depreciation (Abschreibungen) as a tax optimization tool. The depreciation of your assets can reduce your annual tax burden, i.e., the decrease in value of your declared assets can effectively shrink your tax base.
However, the depreciation of an asset is not always deductible because you have to distinguish between whether it is a conventional depreciation, a collective item, or the depreciation of low-value assets (geringwertiger Wirtschaftsgüter—GWG). Low-value assets are purchases with a value of up to €800. The deduction of these purchases is allowed using a simplified (one-time and immediate) deduction, whereas, in the case of higher-value purchases, deductions are normally done over several years.
For all assets over €800, the German Department of Finance regularly publishes updated depreciation allowances that help you determine how long the customary deduction period is for the asset. For example, notebooks and laptops can be completely written off (ie fully depreciated) after three years of use.
Pauschalen: Making use of flat-rate tax allowances
Beyond depreciation and cost deductions (Kostenabsetzungen), you can also use flat-rate tax allowances to reduce your taxable income. The tax office and others automatically deduct some tax exemptions you must specify yourself in your tax return (Steuererklärung). If you claim a Pauschalen, you generally do not need proof—but if your expenses are higher than the flat rate, you should claim that instead. However, you will need supporting documentation for this.
Investitionsabzugsbetrag: Using the investment deduction amount
Entrepreneurs in Germany with business assets up to a maximum of €235,000 have another possible tax deduction. If you know the cost of the movable assets you will acquire in the future, you can already use the investment deduction amount (Investitionsabzugsbetrag – IAB) in your current tax return (but before the actual purchase) up to 40% of the total tax-deductible. However, the investment must actually be made after three years at the latest; otherwise, you run the risk of hefty tax back payments.
You will find an overview of all allowances and lump sums that are available to you as a self-employed person in this German language (sorry, we’re still working on the English version).
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What are the typical costs that are tax deductible?
These items are only intended as an initial overview and not as an exhaustive list. Every business is different, and costs that another business owner cannot write off may be easily recognised. Always take into account that you’ll need to prove that the expenses were incurred because of a business need.
The deductible costs and lump sums for self-employed persons include:
- Depreciation and amortisation (Abschreibungen)
- Hospitality expenses (Bewirtungskosten)
- Loans (Darlehen)
- Business trips (Geschäftsreisen)
- Employee benefits
- Investment deductions (Investitionsabzüge)
- Gifts
- Wages and salaries (Lohn- und Gehaltszahlungen)
- Taxes (Steuern)
- Inventories (Warenvorräte)
- Rent (Mieten)
- Vehicle costs (Kfz-Kosten)
Deducting an office/workroom and rent as a self-employed person
Self-employed people who work from home may be able to claim their home office as tax-deductible (German article). The deduction amount depends on how your room is used. If the room is used for private and professional purposes or if another room is available for your professional activity, you can’t deduct anything. However, if your workroom is central to your business, there is no upper limit on the deduction. If no other room is available, you can deduct up to €1,250 annually as business expenses. The self-employed person cannot only deduct the rent from their taxes but also various other costs around the workplace.
The deductible costs for the study include:
- Rent or building deductions (Miete oder Gebäudeabschreibungen)
- Interest (Zinsen)
- Waste disposal (Müllabfuhr)
- Repair costs (Reparaturkosten)
- Energy costs (Energiekosten)
- Contributions to home insurance (Hausversicherungen)
- Property tax (Grundsteuer)
- Maintenance and renovation (Instandhaltung und Renovierung)
Self-employed persons who use co-working spaces should also diligently gather proof that the tax office can use for their calculations, including the floor plan of the building, to determine the rent and utility amounts that are deductible.
Tax-deductible work equipment
The definition of work materials can be completely different depending on the profession. From office equipment to tools and utensils to post-it notes, you can deduct quite a bit from taxes as a self-employed person. To be able to deduct working materials for tax purposes, 90% of them must be used for professional purposes. Everything under that must be taxed as a private withdrawal.
Working materials include:
- Office furniture (table, chair, shelf)
- Mobile phone
- Computers, laptops and notebooks
- Devices and machinery
- Software
- Work clothes (including cleaning)
- Specialist literature
- Tool
- Briefcase
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Deducting a company car as a self-employed person
Self-employed persons can also deduct the company car from their taxes. There must also be a commercial use of 90% or more, so you can save the largest possible amount. If your use exceeds this 90%, all expenses are deductible as income-related expenses, including interest, fuel and insurance. You can also use the deduction tables for the company car. So that you can deduct travel expenses, the maintenance of the logbook for self-employed is mandatory. Depending on the distance to the workplace, it may be cheaper for you to purchase the vehicle privately and bill the kilometres you have travelled for the travel allowance (German article). If you use the company car primarily for professional purposes, you may also be able to use the 1% rule to deduct personal trips for tax purposes.
Claiming education and training costs as tax deductions
As a self-employed person, you can deduct up to €4,000 a year – but only as long as the tax office sees a recognisable connection to your activity.
Deducting health insurance contributions as a self-employed person
The so-called Basisversorgung (basic coverage), which accounts for the majority of your health insurance, you can deduct from the taxes. Optional tariffs and additional benefits are non-deductible. Privately insured self-employed persons receive annually from their insurer a receipt, which contains the deductible amount. Health insurance is specified in the tax return as a special expense (Sonderausgabe). Be aware, however, that there’s a maximum limit for pension costs: Self-employed persons are credited with up to €2,800 – more than employees, as they, as employers, co-finance their employees’ contributions.
Deducting hospitality costs
Many self-employed people do business with clients during a meal. The tax office knows this too and grants the deduction of entertainment costs – these can, if the right supporting documents are available, be deducted up to 70% as operating expenses. Your receipt must list not only the location and the occasion but also all persons involved.
Meal allowances and cost deductions
The self-employed person can tax deduct their meals on business trips lasting more than eight hours per day. Depending on the duration of the trip, certain flat-rate allowances apply (this also applies to trips abroad and hotel accommodation), which are updated annually – a look at the current rates is always worthwhile before departure.
Deducting compensation payments
Compensation may be claimed as business costs in the following cases:
- Destruction of property by an employee
- Violation of a non-competition clause (Wettbewerbsverbot)
- Breach of contract related to taxable income
Deducting company outings and birthday parties for tax purposes
Even when planning a company outing, businesses can benefit from allowances. For example, tax-free expenses of €110 per employee.
On the other hand, employees’ birthday celebrations depend heavily on the purpose of the event. If it’s a professionally arranged celebration to cultivate a good workplace culture, a business can at least partially deduct costs.
Deducting costs as a self-employed person: Other deductible items
Of course, the costs listed so far are not a complete list of all possible deductible costs – the self-employed still have many opportunities to claim expenses.
The following items are still deductible:
- Cost of creating/managing business websites
- (Promotional) gifts and donations
- Treatment of job-related illnesses
- Severance pay
- Account fees
- Job-specific insurances
- Contributions to professional associations
While some tax allowances are set to a certain amount, other costs must be deducted individually. If you are unsure how and if you can claim individual items on your tax return, contact your tax adviser.
