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Income Tax & Business Expenses: What Do Small Businesses Need To Know?

Logically, actually: You have to pay income tax on your profit, if it is above the property tax allowance. You pay income tax personally, not yours Company , But what is the profit and how is it calculated for small companies that do not do any accounting?


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In the beginning there is the income from your entrepreneurial activity, for which you have to pay income tax. But not only for that: if you make money not only with your company, but also with capital gains, rentals and non-self-employed activities, you also have to pay tax on this.

In the case of the tax declaration, you must list your income individually for each type of income and then add it together. The key point: If you have lost any kind of income, you can offset it against your income from other sources.

Curiosity of tax law

German tax law comes up with some curiosities - for example on the deductibility of detectives or on electricity generation in your own home.

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No wonder than that the same horror can be observed every year: the tax return throws adults back to the stage of small children who have not cleaned up and are now afraid of abuse. People with a high school diploma and a brown belt in karate feel stupid and helpless in the face of gruesome word monsters. And it is a steep template for relationship crises.

Caution withholding tax

Since the flat-rate tax came into force, losses from the sale of listed shares or other shares in a corporation may no longer be offset against other income, including interest or dividends, but only against profits from such speculative transactions.

Finally, you use the income to calculate your profit - the so-called taxable income. This is done by deducting special expenses, extraordinary expenses and of course operating expenses from the total amount of your income. From what is left as a profit, the property tax exemption is tax-free. Only what goes beyond that has to be taxed.

Electricity generation and sale in one's own home is an entrepreneurial activity

Anyone who operates a block heating power plant in their house and generates electricity with it, regularly counteracts Payment is fed into the power grid, is considered an entrepreneur - with all advantages and disadvantages. A ruling by the Federal Fiscal Court (VR 80/07) states: A combined heat and power unit installed in a single-family house, with which not only heat is generated but also electricity, which is fed into the general electricity grid in whole or in part, regularly and not only occasionally, serves the purpose of sustainable Generating income from electricity generation. Such an activity therefore establishes the entrepreneurial status of the operator, regardless of the amount of income generated, even if he is not otherwise entrepreneurial.

This results in all entrepreneurial obligations, which are however limited below certain income thresholds: business registration and payment of trade tax / municipal business tax (only from a profit of € 24.500), membership in the Chamber of Industry and Commerce etc. But you can also pay the costs from the purchase of the combined heat and power plant deduct as input tax under the general conditions of § 15 UStG.

The tax declaration

A major difference to the tax payments for employees is in Sense and purpose of the tax return: As an employee, taxes are automatically deducted from you every month and you get the overpaid taxes at the end of the year with the tax return. It is therefore voluntary for employees.

As a self-employed person, you only state how much you have actually earned with your tax return. Therefore, you definitely have to hand them in. You are only exempt from this obligation if you are below the tax-free allowance and you have earned more than the mini-job limit per year with your self-employment.

The tax assessment

You pay your taxes when you receive the corresponding tax assessment from the tax office. If you pay more than 200 Euro Taxes per year, you will have to make quarterly income tax prepayments in the future. The amount for this determines the tax office. Next year, you can recover the tax that you may have overpaid at the time of your tax return - or pay tax on it, as the case may be.

If you are not obliged to account, your tax return usually consists of the income tax return form, the GSE Appendix for income tax return form and the profit calculation on the income statement form. You must submit the declaration for the previous year to the tax office by May 31st. If you have a tax advisor, the deadline extends until September 30th. And you can apply for an extension of the deadline at the tax office - simply an informal letter is enough.

Most people still make their tax returns on paper. The forms for this are available in every tax office or also for download from the Federal Finance Administration. In the meantime, however, you can also submit the income tax return via the Internet. In the near future, this should even become a duty - as it already exists today for the VAT return.

What is considered business expenses?

The cardinal question with every tax return, however, is: How do I determine the profit? And what counts as business expenses? There is actually a very simple answer: The profit is the amount that is shown on the income surplus after deducting your operating expenses. And in principle, all costs related to the generation of your income are operating expenses. However, you may not deduct private expenses. We would like to use two judgments of financial law to illustrate how curious this can be in detail:

You cannot deduct the detective for your wife from the tax

The Rhineland-Palatinate Finance Court had to rule on whether the fees for a lawyer and a detective who were engaged in connection with a maintenance process can be deducted from the tax as extraordinary burdens.

The applicant had submitted that the costs were inevitable. However, the tax court ruled that the expenses were a completely different matter that was outside of the divorce proceedings. Therefore there is no direct connection with the divorce process. That applies both to the legal costs in this matter as well as to the associated detective costs.

Flat-rate taxation of the monetary benefit: with limits

In a judgment of January 11, 2009 VI R 22/06, the Federal Finance Court (BFH) decided that an evening event reserved only for executives of a company, due to the lack of openness among the participants, did not constitute an operating event justifying the flat-rate taxation of the monetary benefit.

In the event of a dispute, an international consulting company (employer) held various specialist conferences for the employed managers. The meetings were followed by evening events with musical and artistic performances. The company assumed tax-privileged company events; The monetary benefits accruing to managers should therefore be taxed at a flat rate of 40% according to Section 2 Paragraph 1 Sentence 2 No. 25 of the Income Tax Act. In contrast, the tax office (FA) determined the wage tax with an individually calculated, significantly higher net flat tax rate.

The BFH confirmed the FA's view. He first stated that company events promoted contact between employees and thus also promoted the working atmosphere. If the employer's benefits do not exceed a certain exemption limit, there is therefore no wages due to the employer's own business interests. In the case of dispute (assessment periods 200 to 1997), however, this exemption limit of DM 2001 was considerably exceeded. The BFH also confirmed its previous case law, according to which the concept of company event is only fulfilled if participation is open to all employees; the limitation of the group of participants should not turn out to be a preference for certain groups of employees. The flat-rate taxation with an average tax rate of 25% is structurally designed to enable simple and appropriate taxation of such pecuniary benefits that arise from the entire workforce with employees from various wage groups taking part in the company event. The tax rate of 25% reflects the “vertical participation” of the workforce in the company event in an appropriate and realistic manner. In the case of evening events only reserved for executives, the average tax rate of 25% falls short, however, in particular of the principle of taxation based on financial capacity.

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4 responses to "Income Tax & Business Expenses: What Do Small Businesses Have to Consider?"

  1. Tanya says:

    I stumbled upon this page by chance and think it's really good.

  2. W. Brickett says:

    This tax post reminds me to bookmark your blog so I can always come back.

  3. Anonym says:

    So that means that one
    Trader who is below the tax-exempt amount,
    does not have to submit an ESt.-declaration? And if so by what
    is this justified?

    I only know the blanket statement of my FA that
    Traders always submit an ESt.-declaration
    need to [sales tax §18 (3)].
    Thank you!

    • Simone Janson says:

      Hallo,
      there are several laws. You can find a note in the Income Tax Implementation Regulation http://www.gesetze-im-internet.de/estdv_1955/__56.html
      However, we can not make legal advice here; more precise information can only be provided by a tax consultant.
      It is probably easier to make the tax return - especially if the tax office requests it. Because they want to make sure that you are really below the tax allowance.

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