What is income from business operations?

A business operation according to § 15 EStG exists if you carry out 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 activities 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 joint-stock 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.
• Profits 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).

(2023): What is income from business operations?

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

A business according to § 15 EStG exists if you engage in an activity independently (i.e. at your own expense 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 also apply in the same way to freelance work according to § 18 EStG (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 (§ 2 Abs. 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 (§ 16 EStG).
• Profits 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 Nr. 40 Buchst. c EStG). For shares 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 is fully taxable as capital income from 2009, regardless of the holding period, and is subject to the withholding tax of 25%. However, this only applies to shares acquired from 2009 onwards (§ 20 Abs. 2 Nr. 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.
• 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. If up to three properties are sold, 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 §§ 1896 ff. BGB have not generated income from business since 2010, contrary to previous opinion, but from "other self-employed work" according to § 18 Abs. 1 Nr. 3 EStG (BFH rulings of 15.6.2010, BStBl. 2010 II p. 906 and 909).

(2023): Who is required to complete Form G (Income from Business Operations)?

What is a net income method?

With the income surplus calculation 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 principle. This simple form of accounting does not take provisions into account, for example.

Another advantage is that the income surplus calculation does not require the maintenance of inventory accounts or a stocktake.

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

(2023): What is a net income method?

Do I need to submit Form EÜR (net income method)?

The "Income surplus calculation - Form EÜR" 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 "Form EÜR" 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 "Form EÜR" and also submit it electronically to the tax authorities, just like the income tax return.

The previous statutory hardship regulation 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 rarely grant exceptions!

Check all your EÜR data for plausibility and compare them with data from other entrepreneurs if possible. If your details deviate significantly from the usual ones, 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 ...".

(2023): Do I need to submit Form EÜR (net income method)?

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

In the net income 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 calculate their profit using the net income method 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 persons can always use the net income method for their profit calculation - regardless of turnover and profit limits. They are generally not required to keep accounts, but may do so voluntarily.

Merchants within the meaning of §§ 1 ff. in conjunction with § 238 HGB are always obliged to keep accounts - regardless of turnover or profit limits. 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.

(2023): 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 prepare 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 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 setup 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 cash basis accounting 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 already 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 a 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.

(2023): 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 income assessment if a different tax office from your local tax office is responsible for this income. 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 joint assessment is also carried out.

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 value in the relevant field and explain this in the cover letter to your tax office.

(2023): 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 is also considered to be the closure of a business. Shares in a company that are created when a business, part of a business, or share in a partnership is contributed to a company as an asset in exchange for shares in the company at below market value are also included (§ 21 UmwStG).

If you sell or close your business or share in a partnership, you 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 is more than 136,000 Euro, by the amount exceeding this. Therefore, the tax allowance for sale 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 for work, 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 share in a partnership, you are also entitled to the full tax allowance for sale, not just a proportionate amount. However, if you sell only part of your share in a partnership, 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).

To prove permanent incapacity for work, a notice from the pension insurance provider or a medical certificate is usually sufficient. This can also be provided by a private insurance company if their conditions meet a certain threshold for incapacity for work. However, it has been established that there are other ways to prove permanent incapacity for work (BFH ruling of 14.12.2022, X R 10/21).

(2023): 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 to be 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 Form G for traders or in Form S for freelancers and other self-employed persons.

(2023): 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 corporations (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 corporations (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 corporations 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 Form G or Form S.

(2023): 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 secondary 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 obliged 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.

(2023): 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's 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.

(2023): Is there an obligation to submit the EÜR electronically even if the profit is small?

Photovoltaics: Operating and selling the system are business income

Even before 2022, the tax authorities allowed concessions for operators of small photovoltaic systems, but only for systems up to 10 kWp: Upon written application by the taxpayer, it could be assumed that a system was not operated with the intention of making a profit ("hobby option"). As a result, it was possible to forgo the preparation and submission of an income statement, and profits no longer had to be taxed.

Since 1 January 2022, photovoltaic systems on single-family homes (including roofs of garages and carports as well as other outbuildings) up to 30 kWp have been legally exempt from tax.

However, not only systems on single-family homes are eligible:

• Systems installed on buildings not used for residential purposes (e.g. commercial property, garage courtyard) are also exempt from tax. The limit here is also 30 kWp.
• For systems on multi-family houses and mixed-use buildings, the limit is 15 kWp per residential or commercial unit.
• In addition, photovoltaic systems on buildings predominantly used for business purposes are eligible up to 15 kWp per residential/commercial unit.
• A maximum of 100 kWp per taxpayer or partnership is exempt from tax.

The tax exemption applies regardless of when the photovoltaic system was commissioned for income and withdrawals generated since 1 January 2022.

The simplification rule from 2022 is structured differently from the previous hobby option: Taxation is now compulsorily waived and not just as part of an option. A "hobby application" is therefore no longer relevant. This is regulated in § 3 No. 72 EStG in the version of the Annual Tax Act 2022.

(2023): Photovoltaics: Operating and selling the system are business income

Is a home office deductible for managing the photovoltaic system?

Since 1 January 2022, photovoltaic systems on single-family homes (including roofs of garages and carports as well as other outbuildings) up to 30 kWp have been legally exempt from tax.

However, not only systems on single-family homes are eligible:

• Systems installed on buildings not used for residential purposes (e.g. commercial property, garage courtyard) are also exempt from tax. The limit here is also 30 kWp.
• For systems on multi-family houses and mixed-use buildings, the limit is 15 kWp per residential or commercial unit.
• Photovoltaic systems on buildings predominantly used for business purposes are also eligible up to 15 kWp per residential/commercial unit.
• A maximum of 100 kWp per taxpayer or partnership is exempt from tax.

The tax exemption applies regardless of when the photovoltaic system was commissioned for income and withdrawals generated since 1 January 2022.

Expenses may not be deducted as business expenses or advertising costs if they are directly economically related to tax-free income. This is regulated in § 3c para. 1 EStG. This also means that operating expenses directly economically related to the (possibly future) operation of tax-exempt photovoltaic systems are not deductible. This also applies to any costs of a home office in connection with the management of the photovoltaic system.

(2023): Is a home office deductible for managing the photovoltaic system?