What is income from business operations?

A business operation according to § 15 EStG exists if you engage in an activity independently (i.e. on your own account and responsibility), sustainably (i.e. not a one-off action) and with the intention of making a profit (i.e. not a hobby) and participate in general economic transactions (i.e. appear externally). However, these conditions apply equally to freelance work according to § 18 EStG.

Businesses include:

• Craft and industrial businesses,
• Trading businesses,
• Brokerage activities (e.g. insurance agents, brokers or commercial agents),
• Catering businesses,
• Service companies.
• Corporations such as public limited companies (AG) and limited liability companies (GmbH) are businesses by virtue of their legal form (§ 2 para. 2 GewStG).

Income from business operations also includes:

• Profit shares from participation in a partnership (oHG, KG or commercial GbR).
• Income from the sale of a business, part of a business or a share in a business.
• Gains from the sale of a share in a corporation if this amounts to at least 1% of the share capital (§ 17 EStG). This also applies to private investors. Since 2009, the partial income procedure applies, i.e. 60% of the capital gain is taxable and 40% is tax-free (§ 3 No. 40 letter c EStG). For shares acquired before 2009, the half-income procedure with its half taxation still applies.
• Income from the sale of more than 3 properties within 5 years. In this case, the tax office assumes commercial property trading, regardless of the 10-year period.
• Income from the rental of holiday homes if the type of rental is comparable to a commercial accommodation business. Otherwise, it is "income from renting and leasing".
• Professional carers according to §§ 1896 ff. BGB have not earned income from business operations since 2010, contrary to previous opinion, but from "other self-employed work" according to § 18 para. 1 No. 3 EStG (BFH rulings of 15.6.2010, BStBl. 2010 II p. 906 and 909).

(2022): What is income from business operations?

Who is required to complete Form G (Income from Business)?

A business as defined in Section 15 of the Income Tax Act exists if you engage in an activity independently (i.e., at your own expense and responsibility), on a sustainable basis (i.e., not a one-off action), with the intention of making a profit (i.e., not a hobby), and participate in general economic transactions (i.e., appear externally). However, these conditions also apply in the same way to freelance work as per Section 18 of the Income Tax Act (H 15.6 EStR).

Businesses include

• Craft and industrial enterprises,
• Trading businesses,
• Brokerage activities (e.g., insurance agents, brokers, or commercial agents),
• Catering businesses,
• Service companies.
• Corporations such as public limited companies (AG) and limited liability companies (GmbH) are businesses by virtue of their legal form (Section 2 (2) GewStG).

Income from business also includes

• Profit shares from participation in a partnership (oHG, KG, or commercial GbR).
• Income from the sale of a business, part of a business, or a share in a business (Section 16 EStG).
• Gains from the sale of a shareholding in a corporation if this amounts to at least 1% of the share capital (Section 17 EStG). This also applies to private investors. Since 2009, the partial income procedure applies, i.e., 60% of the capital gain is taxable and 40% is tax-free (Section 3 No. 40 letter c EStG). For shareholdings acquired before 2009, the half-income procedure with its half taxation still applies.
  For a shareholding of less than 1% of the share capital, the capital gain has been fully taxable as capital income and subject to the withholding tax of 25% since 2009, regardless of the holding period. However, this only applies to shares acquired from 2009 onwards (Section 20 (2) No. 1 EStG). For acquisitions before 2009, the previous legal situation still applies, according to which a capital gain is tax-free after a holding period of 12 months. Distributions are subject to withholding tax in both cases from 2009 onwards.
• Income from the sale of more than 3 properties within 5 years. In this case, the tax office assumes commercial property trading, regardless of the 10-year period. For the sale of up to three properties, the capital gains are usually only taxable within the so-called speculation period of 10 years, as "other income".
• Income from the rental of holiday homes if the type of rental is comparable to a commercial accommodation business. Otherwise, it is "income from renting and leasing".
• Professional guardians according to Sections 1896 ff. BGB have not earned income from business since 2010, contrary to previous opinion, but from "other self-employed work" according to Section 18 (1) No. 3 EStG (BFH rulings of 15.6.2010, BStBl. 2010 II p. 906 and 909).

(2022): Who is required to complete Form G (Income from Business)?

What is a net income method?

With the income statement according to Section 4 (3) EStG, you can easily determine your business profit. Business income and expenses are recorded and compared using the cash basis method. This simple form of accounting does not take provisions into account, for example.

Another advantage is that the income statement does not require the maintenance of balance accounts or an inventory.

If you determine your profit using the income statement, the surplus of your income over your business expenses is the profit that is declared for taxation in the tax return.

(2022): What is a net income method?

Do I need to submit Form EÜR (income surplus calculation)?

The "income surplus calculation - EÜR form" standardises the income surplus calculation.

In the EÜR, you must provide detailed information about your income and expenses.

Until 2016, you were only required to submit this form if your business income exceeded 17,500 Euro and the profit was not determined through accounting (genuine bookkeeping). However, since the 2017 tax year, the simplification rule has been abolished, which allowed a non-formal income surplus calculation to be submitted instead of the formal "EÜR form" if business income was less than 17,500 Euro. Now, all taxpayers who determine their profit using the income surplus calculation are generally required to complete a standardised "EÜR form" and also submit it electronically to the tax authorities, just like the income tax return.

The previous statutory hardship rule still applies: To avoid "unreasonable hardship", the tax office may allow the tax return to be submitted to the tax office in paper form using the officially prescribed form (§ 25 para. 4 sentence 2 EStG; § 13a para. 3 EStG; § 18 para. 3 sentence 3 UStG; § 14a sentence 2 GewStG). In addition to the individual legal regulations, the Fiscal Code contains a general hardship regulation (§ 150 para. 8 AO): The tax office can waive electronic data transmission if it is economically or personally unreasonable for the taxpayer.

This is particularly the case if the taxpayer does not have the necessary technical equipment and creating the technical means for remote data transmission of the officially prescribed data set would only be possible with considerable financial effort, or if the taxpayer is not or only partially able to use the remote data transmission options due to their individual knowledge and skills. However, the tax authorities very rarely grant exceptions!

Check all the data in your EÜR for plausibility and compare it with data from other entrepreneurs if possible. If your information deviates significantly from the usual, the tax office may be prompted to conduct an individual audit.

If you wish to submit your tax return and especially your profit calculation for freelance or business income in paper form, you must submit a "hardship application under § 5b para. 2 sentence 2 EStG in conjunction with § 150 para. 8 AO" to the tax office, provide sufficient justification, and refer to the current rulings.

Important: According to the BFH, the hardship application may only refer to the respective assessment period (BFH ruling of 16.6.2020, VIII R 29/17). This means the application must be submitted anew for each year. It must not state "I request exemption from the assessment period ...", but only "I request exemption for the assessment period ...".

(2022): Do I need to submit Form EÜR (income surplus calculation)?

When can I determine the profit using the net income method?

In the cash basis accounting method according to § 4 para. 3 EStG, business income is compared with business expenses, and the result is the profit or loss.  

Traders and farmers can currently determine their profit using cash basis accounting if

• the annual turnover does not exceed 600,000 Euro and
• the annual profit does not exceed 60,000 Euro in the calendar year or financial year.

Freelancers, such as lawyers, notaries, tax consultants, doctors, journalists, artists, etc., and other self-employed individuals can always use cash basis accounting for their profit calculation - regardless of any turnover and profit limit. They are generally not required to keep accounts, but may do so voluntarily.

Merchants as defined in §§ 1 ff. in conjunction with § 238 HGB are always obliged to keep accounts - regardless of any turnover or profit limit. This accounting obligation also applies to tax law (§ 140 AO). The regulation applies to merchants who operate a commercial business, as well as entrepreneurs whose business operations require a commercial organisation due to their nature and scope.

(2022): When can I determine the profit using the net income method?

Is it possible to choose the net income method retrospectively?

Taxpayers who are not required to keep accounts and do not voluntarily keep books and make financial statements have the right to choose between the business asset comparison under section 4 (1) EStG and the cash basis accounting under section 4 (3) EStG:

• A taxpayer not required to keep accounts has - according to previous opinion - effectively exercised their right to determine profits through inventory comparison under section 4 (1) EStG only when they prepare an opening balance sheet, set up commercial bookkeeping, and make a financial statement based on inventories.

• If, on the other hand, the taxpayer has only recorded business income and expenses, they have exercised their option for profit determination through cash basis accounting in accordance with section 4 (3) EStG based on this actual practice.

According to the new opinion, the entrepreneur can also exercise the option after the end of the year, in principle indefinitely until the tax assessment becomes final. If the entrepreneur then prepares an annual financial statement, they only decide on profit determination through accounting at that point - and not already with the establishment of bookkeeping at the beginning of the financial year (BFH ruling of 19.3.2009, BStBl. 2009 II p. 659).

However, the option is restricted by certain conditions (section 4 (3) sentence 1 EStG). For example, the choice of surplus calculation is no longer possible after the financial statement has been prepared. Similarly, the choice of profit determination through inventory comparison is excluded if the taxpayer has not prepared an opening balance sheet and set up commercial bookkeeping promptly at the beginning of the profit determination period. The choice between the types of profit determination may also be excluded if the taxpayer is bound by a choice made for a previous financial year.

Note: This interpretation also serves the simplification purpose of cash basis accounting. The taxpayer can opt for cash basis accounting to avoid preparing the financial statement, even if they have already set up bookkeeping. For the tax office, it is only important that it actually receives the cash basis accounting after the choice has been made.

(2022): Is it possible to choose the net income method retrospectively?

When must I declare my profit from business operations separately?

You must make a separate determination of income if a different tax office from your local tax office is responsible for it. This is the case, for example, if you operate your business at a location other than your place of residence.

If you are involved in a joint venture or partnership, a separate and uniform determination is also made.

Your local tax office will be informed of the amount of income attributable to you. You must therefore always provide the relevant tax office and the tax number under which this income is assessed.

If you do not (yet) know the exact amount of the tax assessment, enter "0.00" or the estimated amount in the relevant field and explain this in the cover letter to your tax office.

(2022): When must I declare my profit from business operations separately?

What is included in capital gains?

Income from business operations also includes the profit from the sale of an entire business, a part of a business (branch, subsidiary), or a share in a partnership. A sale also includes the closure of a business. Shares in a company acquired through contributions are also covered; these arise when a business owner contributes their business, part of a business, or partnership share to a company as a capital contribution and receives shares in the company at below market value (§ 21 UmwStG).

Anyone who sells or closes their business or partnership share can take advantage of two important tax benefits:

• Tax allowance for sale: The profit from the sale is tax-free up to 45.000 Euro. However, this amount is reduced if the profit from the sale exceeds 136.000 Euro, by the amount exceeding this limit. Therefore, the tax allowance is no longer available from a profit of 181.000 Euro (§ 16 Abs. 4 EStG).
• Reduced tax rate: The remaining profit after deduction of the allowance is eligible for the one-fifth rule. Upon request, it can also be taxed at a reduced rate, namely 56% of the average tax rate and at least 14% (§ 34 Abs. 3 EStG).

The tax allowance for sale and the reduced tax rate are only granted under certain conditions:

• You must be at least 55 years old or permanently incapacitated for work in the sense of social security law.
• You can only claim the benefits once in your lifetime: the tax allowance for sale from 1996, the reduced tax rate from 2001.
• You must apply for the benefits.

If the business is sold before the age of 55, without being permanently incapacitated, only the one-fifth rule applies. However, this rule does not result in any tax savings if current income is already taxed at the top rate.

When selling a partnership share, you are also entitled to the full tax allowance for sale, not just a proportionate amount. However, if you sell only part of your partnership share, the profit from the sale is considered current income, and neither the tax allowance for sale nor the reduced tax rate or the one-fifth rule apply (§ 18 Abs. 3 i.V.m. § 16 Abs. 1 Satz 2 EStG).

(2022): What is included in capital gains?

Who qualifies as a joint entrepreneur?

A joint partner is someone who, together with at least one other partner, is an owner, tenant, and/or beneficiary of a business.

This means you are in a position to make economic decisions only together with your business partner(s) and to decide on the company's profit share. Such a partnership must take the form of a partnership for which the legislator provides three specific types:

• Civil Law Partnership (GbR)
• General Partnership (OHG)
• Limited Partnership (KG)

The type of partnership determines the extent to which joint partners participate in the profit and how the company is treated for tax purposes. In the tax return, you specify the type of business you operate or lease as a joint partner in the form of a partnership. Possible entries could be: "craft business", "real estate agent", "restaurant", etc. In addition to this information, you must also enter the tax number of each business and the respective tax office in the tax return.

The result of the respective profit calculation is entered in Appendix G for traders or in Appendix S for freelancers and other self-employed persons.

(2022): Who qualifies as a joint entrepreneur?

What is the half-income / partial income procedure?

The half-income procedure was replaced on 1 January 2009 by the partial income procedure.

Under the half-income procedure, income from shares in companies (shares, GmbH shares, cooperative shares) is only 50% taxable. Advertising costs related to this can also only be deducted by half. If such shares are part of business assets, the income from them - after deducting half of the expenses - is to be taxed as income from business operations.

If your income from business operations (as a sole trader, from a partnership, according to separate determination, from a group) includes income for which the half-income procedure applies, enter this amount here as a total. Only the half taxable partial amount!

Under the partial income procedure, income and capital gains from shares in companies (shares, GmbH shares, cooperative shares) are 60% taxable. In return, only 60% of the expenses are deductible as advertising costs. So if you hold shares in companies as business assets, you must separately declare dividends and profit distributions received, which are included in your income from business operations or self-employment and are only 60% taxable, in Annex G or Annex S.

(2022): What is the half-income / partial income procedure?

Is there also an obligation to submit the EÜR form electronically for secondary business income?

For self-employed individuals, tax returns in paper form are no longer accepted. This also applies to private households with photovoltaic systems and individuals with additional business income of more than 410 Euro, such as part-time winegrowers. Tax offices consistently reject tax returns submitted in paper form.

This means: If there is no hardship case, a paper tax return is considered not submitted. A hardship case applies if the purchase of the necessary technical equipment with a PC and internet connection is only possible with significant financial effort, or if the knowledge and personal skills to use them are not or only partially available.

In this case, late fees may apply.

Note: Employees and pensioners who are not required to submit an electronic tax return and receive expense allowances for their voluntary work up to the amount of the volunteer allowance of 840 Euro or the trainer allowance of 3.000 Euro per year may, in our opinion, still use the paper forms for the tax return. However, tax offices are increasingly handling this more restrictively.

(2022): Is there also an obligation to submit the EÜR form electronically for secondary business income?

Is there an obligation to submit the EÜR electronically even if the profit is small?

The Rhineland-Palatinate Tax Court has ruled that taxpayers with income from profits are required to submit their income tax return electronically to the tax office, even if they earn only minor profits from part-time work. The electronic form is mandatory if the profit exceeds 410 EUR (Rhineland-Palatinate Tax Court, 15.7.2015, 1 K 2204/13).

The case: The claimant is self-employed part-time as a photographer, author, and diving instructor. The tax office first informed him in 2011 that he was required to submit his income tax return electronically due to this self-employment. The claimant argued that the profits from his self-employed work would only be around 500 Euro per year in the future. He also fundamentally opposed the transmission of personal data via the internet, as he had already had relevant experiences with internet misuse. Even with internet banking, absolute security could not be guaranteed.

According to the tax court, the Income Tax Act requires the electronic form if the profit exceeds 410 Euro. This form was not unreasonable for the claimant. The residual risk of a hacker attack on the stored or transmitted data, remaining after all technical security options have been exhausted, must be accepted in view of the state interest in administrative simplification and cost savings.

Absolute confidentiality of data cannot be guaranteed anyway, as data stored "analogue" in paper form could also be stolen, e.g. in a burglary at home or – as reported in the media on 13.6.2015 – in burglaries of bank mailboxes. Electronic tax returns are also required for VAT, and the Federal Fiscal Court has already ruled that this is constitutional despite the "NSA affair".

Currently, the Münster Tax Court has ruled that a balance sheet may also be submitted to the tax office in paper form if the creation of the technology for data transmission would be financially too costly (judgment of 28.1.2021, 5 K 436/20 AO).

However, the Federal Fiscal Court has ruled that a financial expense of 40.54 Euro for the required electronic transmission of the balance sheet and the profit and loss account in the officially prescribed data format is also (economically) reasonable for a "micro business" (Federal Fiscal Court judgment of 21.04.2021, XI R 29/20).

Note: Employees and pensioners who are not required to submit an electronic tax return and receive expense allowances for their voluntary work up to the amount of the volunteer allowance of 840 Euro or the trainer allowance of 3.000 Euro per year may, in our opinion, continue to use the paper forms for the tax return. However, the tax offices are increasingly handling this more restrictively.

(2022): Is there an obligation to submit the EÜR electronically even if the profit is small?

Photovoltaics: Operating and selling the system are business income

The tax authorities and tax courts treat income from the operation of a photovoltaic system as "income from business operations". But is this really correct? In fact, the operation of a photovoltaic system lacks all the characteristics of a business, such as active participation in the market and competition, own pricing, various customers, the possibility to change the network operator, active involvement of the operator (who actually does nothing).

The operator even lacks a say, as the network operator unilaterally determines the contract conditions. The photovoltaic operator actually has no say. The installation of photovoltaic systems is also approved in purely residential areas where commercial activity is prohibited.

In fact, with photovoltaics, the operator provides a photovoltaic system that they have purchased and installed for a fixed period of 20 years, namely rented out for a fee (plus VAT) based on the electricity fed in. This is a turnover lease. And this should lead to income from rental and leasing rather than business income. Those who install a photovoltaic system regularly do so because of the expected return.

The 20-year contract period with the regional electricity supplier also shows that it is a medium- to long-term investment, especially since the return is the main focus for investors. Therefore, one could assume that a photovoltaic system leads to "income from rental and leasing" and the sale of the system leads to "other income".

Currently, the Baden-Württemberg Finance Court has ruled that the operation and sale of a photovoltaic system constitutes income from business operations (Baden-Württemberg Finance Court, 5 April 2017, 4 K 3005/14).

According to the judges, the operator of a photovoltaic system undertakes an independent, sustainable activity with the intention of making a profit and participates in general economic transactions (Section 15 (2) EStG). Participation in general economic transactions requires that the activity is provided for a fee on the market and is externally recognisable to third parties, for example by feeding electricity into the grid of an energy supplier for a fee. Activity for a specific contractual partner is sufficient. The fee can be determined on a success-dependent basis. If the operator produces electricity and sells it to a customer, this activity exceeds the scope of private asset management.

New simplification rule for small systems

The Federal Ministry of Finance stipulates that for small photovoltaic systems, it can be assumed on written application by the taxpayer that they are not operated with the intention of making a profit. In this case, there is generally a tax-irrelevant hobby. This means: For the operation of certain photovoltaic systems, it is possible to waive the preparation and submission of an income surplus calculation. In return, however, losses may not be deducted for tax purposes.

The application also applies for subsequent years. The same applies to the operation of small combined heat and power plants (BMF letter of 2 June 2021, V C 6 - S 2240/19/10006 :006, BStBl 2021 I p. 722). The principles are:

• The simplification rule applies to photovoltaic systems with an installed capacity of up to 10 kW, which are installed on owner-occupied or rent-free single and two-family houses, including outdoor installations (e.g. garages), and were put into operation after 31 December 2003.
• The rule also applies to combined heat and power plants with an installed capacity of up to 2.5 kW, if the above conditions ("single and two-family houses") are met.
• For the listed photovoltaic systems and comparable combined heat and power plants, it is to be assumed for simplification purposes, without further examination, on written application by the taxpayer, in all open assessment periods, that they are not operated with the intention of making a profit. In this case, there is generally a tax-irrelevant hobby. The application also applies for subsequent years.
• For assessment periods in which the above conditions do not apply (e.g. in the case of a change of use, enlargement of the system beyond the specified capacity), the simplification rule is not to be applied, regardless of the declaration by the taxpayer. They must inform the relevant tax office in writing of the loss of the above conditions.
• Assessed profits and losses (e.g. in the case of assessments subject to review or provisional assessments) from past assessment periods that are still open to amendment under procedural law (e.g. in the case of assessments subject to review or provisional assessments) are no longer to be taken into account. In these cases, an EÜR form for the operation of the photovoltaic system/combined heat and power plant is no longer to be submitted for all open assessment periods.

Does the equity rule also apply to VAT? No, the rule only applies to income tax and not to VAT. Therefore, a VAT return must still be submitted unless the small business regulation has already been applied. In this respect, the benefit of the equity rule is somewhat limited. However, you should check whether you are now classified as a small business and can then also waive the submission of a VAT return. You can choose the small business regulation (Section 19 UStG) for VAT if your turnover in the previous year was not higher than 22,000 Euro and is not expected to be higher than 50,000 Euro in the current year.

Note: From 1 January 2023, photovoltaic systems are to be given better tax support. This is provided for in the draft Annual Tax Act 2022. In detail:

For income and trade tax purposes, it is planned that not only small systems up to 10 kW will be exempt from taxation. The Federal Government intends to introduce a tax exemption for income from the operation of photovoltaic systems with a gross nominal output (according to the market master data register) of up to 30 kW on single-family houses and commercial properties or 15 kW per residential and commercial unit in other predominantly residential buildings (e.g. multi-family houses, mixed-use properties).

For VAT, the following should apply: For the delivery, intra-community acquisition, import and installation of photovoltaic systems and electricity storage, a VAT zero rate is to apply in future, provided it is a service to the operator of the photovoltaic system and the system is installed on or near private homes, flats and public and other buildings used for activities serving the common good. Operators of photovoltaic systems will therefore no longer be burdened with VAT when purchasing the system, so questions regarding input tax deduction will no longer arise.

Of course, it remains to be seen whether the regulations will actually be adopted as planned. The new EU Directive 2022/542 of 5 April 2022 allows a zero VAT rate. If this zero VAT rate is applied, the input tax deduction of the supplier or tradesperson remains unaffected. This is also permitted by the EU Directive.

(2022): Photovoltaics: Operating and selling the system are business income

Is a home office deductible for managing the photovoltaic system?

By operating a photovoltaic system, you generate income from a business. Various activities are involved in the management of the photovoltaic system: correspondence and billing with the network operator, checking incoming payments, monthly VAT returns, annual VAT declaration, income surplus calculation, evaluations, etc. Such activities are mostly carried out at the dining table, but often also in a home office. The question is whether the home office is recognised for tax purposes and the costs can be deducted as business expenses from business income.

In principle, it is possible to claim expenses for a home office as business expenses up to 1,250 Euro, because "no other workplace is available for the business activity" (§ 4 Abs. 5 Nr. 6b EStG). However, the deduction of business expenses is excluded if the home office is not necessary due to the nature and scope of the activity - at least according to the tax authorities (OFD Rheinland vom 10.7.2012, S 2130-2011/0003-St 142).

HOWEVER: The Federal Fiscal Court ruled on 8.3.2017 (IX R 52/14) as follows: "The term home office requires that the respective room is used exclusively or almost exclusively for business/professional purposes. It is irrelevant whether a home office is necessary for the activity." The Federal Fiscal Court has recently reaffirmed its view from March 2017. According to this, the "necessity" of the home office is not relevant. The "necessity" is not a criterion for deduction. Therefore, a home office can also be deductible if the room is used almost exclusively for professional purposes. The amount of time spent on office work is not relevant (BFH ruling of 3.4.2019, VI R 46/17).

A home office for managing a photovoltaic system is not deductible if it is also used privately to a significant extent. In the case of a mixed-use room, a division of costs and a partial deduction of business expenses is not permitted (BFH ruling of 17.2.2016, X R 1/13).

This is based on the fundamental decision of the Grand Senate on the mixed use of a home office: If a home office is also used privately or a room is not used almost exclusively for professional purposes, the costs cannot be deducted as business expenses, even partially. In any case, the room costs may not be divided into a professional and private share and then deducted for tax purposes with the professional usage share (BFH ruling of 27.7.2015, GrS 1/14).

The lower court had allowed the division of costs for the mixed-use room and recognised half as business expenses for the income from the "photovoltaic business". The office costs were to be "divided in a reasonable manner based on the respective usage, provided the business or private reason is not of completely minor importance. A reasonable basis for division could be the ratio of private and business time shares for the use."

However, this generous view is outdated due to the above-mentioned BFH ruling (FG Munich of 28.4.2011, 15 K 2575/10).

(2022): Is a home office deductible for managing the photovoltaic system?