What records are required?
The basis for the net income method is simple records that capture all income received and expenses paid during the year. According to the "cash basis accounting" principle, business income must be recorded in the financial year it is received, and business expenses must be deducted in the financial year they are paid.
You are therefore spared the dreaded double-entry bookkeeping, the complicated commercial profit and loss account, and you do not need to prepare a balance sheet or conduct an inventory. How you collect your receipts and calculate your figures is largely up to you.
However, it is not sufficient to create a single item for "business income" and "business expenses". If your business is larger, you should break down these items, preferably according to the structure in the tax form "Form EÜR".
Recording income
Even if you use the net income method, you are required to record your income individually for VAT purposes (§ 22 para. 2 UStG; BFH ruling of 26.2.2004, BStBl. 2004 II p. 599). You must list
- VAT-liable income with net amounts and corresponding VAT, separated by tax rates (7%, 19%),
- VAT-exempt income.
Separate records of business expenses
Certain business expenses must be recorded individually and separately from other business expenses, as they are only deductible to the legally prescribed extent (§ 4 para. 7 EStG). Specifically
- entertainment expenses at 70%,
- gifts up to 35 Euro per year and business associate,
- costs of a home office (only if it is the centre of all activities),
- withdrawals and deposits, if you wish to deduct interest expenses as business expenses beyond the basic amount of 2.050 Euro.
Asset register
You must continuously record the following assets in an asset register with their acquisition or production costs and the date of their acquisition, production or deposit (§ 4 para. 3 sentence 5 EStG):
- non-depreciable fixed assets, such as land, investments, other financial assets, non-depreciable intangible assets.
- depreciable fixed assets acquired, produced or deposited into business assets after 5.5.2006. This applies to assets with acquisition or production costs of more than 1.000 Euro net (for acquisitions from 1.1.2008).
- certain current assets acquired, produced or deposited into business assets after 5.5.2006. This applies to shares in corporations, securities and comparable non-certificated claims and rights, land and buildings in current assets.
Note: In this asset register, for depreciable assets (e.g. company car, PC, office furniture, etc.), the book values at the beginning and end of the financial year, as well as the corresponding depreciation amounts and any special depreciation under § 7g EStG, must also be entered.
A further special inventory is required for low-value assets. Those acquired or produced between 2010 and 2018 must
- not be recorded up to 250 Euro net (up to 2017: 150 Euro) (they are written off immediately) and
- be recorded in a special account from 250.01 Euro (up to 2017: 150.01 Euro) to 1.000 Euro net and depreciated as a collective item over 5 years.
Withdrawals and deposits
These must be recorded separately if you have incurred "other interest on debt" for business loans. Otherwise, the deduction of interest on debt is limited to the interest for financing assets and further interest up to only 2.050 Euro (§ 4 para. 4a sentence 6 EStG).
Investment deduction
Special records are required if you wish to claim an investment deduction. This is possible if the profit - without the investment deduction - is not higher than 200.000 Euro.
Home office
For self-employed individuals claiming a home office for tax purposes, specific recording obligations apply according to § 4 para. 7 EStG. These obligations concern the recording of costs attributable to the home office. It is acceptable to estimate these costs and then document them after the end of the financial or calendar year using the annual statement from the financial institution. This also applies to consumption-based expenses such as water and energy costs.
For depreciation amounts, it is sufficient to record them once a year promptly after the end of the respective calendar or financial year. The special recording obligations under § 4 para. 7 EStG do not apply for the deduction of an annual flat rate.
Net income method users are not generally subject to any special legal recording obligations. HOWEVER: A recording obligation may arise under the VAT Act or the "Principles for the proper management and storage of books, records and documents in electronic form and for data access (GoBD)". Entrepreneurs are required to record non-cash transactions within ten days. Cash receipts and payments must be recorded daily. Information must not be lost, so an orderly filing of incoming and outgoing invoices and systematic recording of payments is required. This is usually done by continuously numbering and coding incoming and outgoing invoices, as well as filing them in special folders or through electronic records. Subsequent changes in accounting, such as cancellations or corrections, must be clearly documented. Therefore, do not forgo ongoing records even if you use the net income method.
Important: As an entrepreneur, you must store all documents, including MS Office documents, PDF files and emails, in a way that ensures they cannot be altered afterwards. This means that subsequent changes to electronic documents, even unintentional ones, must be excluded, or traceability through a complete change history must be ensured. Therefore, store electronic documents in a document management system.
(2023): What records are required?
How does the net income method work?
The cash basis accounting (under § 4 para. 3 EStG) is the simplest method of determining profit. Here, business income is compared with business expenses.
The result is the taxable profit or loss.
Business income
./. Business expenses
= Profit or loss
Receipts
Cash basis accounting also requires that business income and expenses are evidenced by receipts. These receipts and bank statements must be collected. Although there is no prescribed form for collecting receipts, you should avoid the famous shoebox. An organised filing of receipts can even - theoretically - suffice instead of records (§ 146 para. 5 AO).
This means that as a cash basis accountant, you theoretically do not necessarily have to record your business expenses, but can prove them solely with receipts.
So much for theory. But beware: a recording obligation may arise under the Value Added Tax Act or the "Principles for the proper management and storage of books, records and documents in electronic form as well as for data access (GoBD)". Entrepreneurs are required to record non-cash transactions within ten days. Cash income and expenses must be recorded daily. Information must not be lost, so an organised filing of incoming and outgoing invoices and a systematic recording of payments is required. This is usually done by continuously numbering and posting incoming and outgoing invoices, as well as filing them in special folders or through electronic records. Subsequent changes in accounting, such as cancellations or corrections, must be clearly documented. Therefore, even as a cash basis accountant, do not forgo ongoing records.
Important: As an entrepreneur, you must store all documents, including MS Office documents, PDF files and emails, in a way that ensures they cannot be altered afterwards. This means that subsequent changes to electronic documents, even unintentional ones, must be excluded or traceability through a complete change history must be ensured. Therefore, store electronic documents in a document management system.
You do not need to send your receipts to the tax office with your tax return. However, you must keep the receipts for 10 years. For tax reasons, all books and records that are relevant for taxation must be kept (§ 147 para. 1 AO).
Cash basis principle
Income and expenses are recorded according to the cash basis principle, i.e. they are booked at the time the payments are made. It is therefore not the date of the invoice that matters, but the date of payment.
Only income and expenses that affect profit, i.e. influence profit, need to be recorded. For example, taking out a loan does not constitute business income and does not need to be recorded in the accounts. On the other hand, amounts of money used to repay a loan are not business expenses. However, interest paid on loans and loan costs may be deductible as business expenses. Similarly, cash withdrawals from the bank account are not taken into account.
You pay an invoice dated 30.11.2021 only on 2.2.2022.
This expense is not taken into account in the profit determination for 2021; it is only recorded in the profit determination for 2022.
Regular recurring payments
Rent, insurance premiums, etc. are considered regular recurring payments made up to 10 days before and after the turn of the year and are to be allocated to the year to which they economically belong. This applies not only to expenses but also to income (§ 11 EStG).
A regular recurring expense is also the advance VAT return for December or the fourth quarter, which must be submitted by 10 January of the following year. The payment in January can therefore be deducted as business expenses in the old year. The same applies in the case of a VAT refund, even if the tax office transfers the money after 10 January (BFH ruling of 1.8.2007, BStBl. 2008 II p. 282).
Example: You transfer the premium for business liability insurance for 2023 on 27.12.22. Although the payment was made in 2022, the amount is allocated to 2023 and only included in the 2023 profit determination.
Net or gross principle?
If you are subject to VAT, it is advisable to show all business income and expenses at net value - i.e. without VAT. The VAT collected and paid must be stated separately. You will need net values for the advance VAT return and the VAT return anyway.
However, if you are exempt from VAT as a small business owner under § 19 UStG, you state your business income at the invoice amount (i.e. without VAT) and your business expenses at the gross amount (including VAT). The same applies to entrepreneurs who only generate VAT-exempt turnover, e.g. doctors, alternative practitioners, physiotherapists, midwives, insurance agents and brokers.
VAT payments
VAT payments affect profit: VAT collected from outgoing invoices is business income, VAT paid (input tax) in incoming invoices is business expenses. VAT refunds from the tax office are business income, VAT payments to the tax office are business expenses.
Accruals and provisions
These are not made because the payment date is decisive. For example, an insurance premium paid during the year does not have to be carried over to the following year on a pro rata basis. It is booked in full in the year of payment.
Receivables and liabilities
These are not shown because only actual payments are recorded according to the cash basis principle.
Balance sheet accounts
These do not need to be maintained. Therefore, there is no cash account. Cash balances in bank accounts do not need to be reconciled with receipts. It is not necessary to record cash payments received in a cash book (BFH ruling of 16.02.2006, X B 57/05).
Inventory
An inventory at the end of the year, i.e. the recording of fixed assets and stock, is not required, as you are not making a comparison of business assets. This also eliminates the tedious valuation of stock.
Current assets
The purchase costs of current assets, such as goods and consumables, are to be recorded as business expenses at the time of payment.
A special rule applies to certain current assets, namely shares in companies, securities and similar non-certificated claims and rights, land and buildings in current assets:
- For purchases after 5.5.2006, the purchase costs of these assets can no longer be deducted in full as business expenses immediately, but the purchase costs or the value replacing them for these assets are only taken into account as business expenses upon sale or withdrawal, i.e. at the time the sales proceeds are received or the item is actually withdrawn (§ 4 para. 3 sentence 4 EStG).
Fixed assets
Fixed assets are not recorded as business expenses in the year of purchase, manufacture or introduction into business assets at the full purchase or manufacturing costs, but only through depreciation - more precisely: depreciation for wear and tear (AfA). For this purpose, the purchase or manufacturing costs are spread over the normal useful life and the pro rata annual amount is recorded as business expenses.
Low-value assets
The following new regulation applies to low-value assets purchased, manufactured or introduced into business assets from 1.1.2018:
- Low-value assets with purchase or manufacturing costs up to 250 Euro (excluding VAT) can be immediately deducted as business expenses or optionally depreciated over the useful life. The option can be exercised individually for each asset (asset-related option). There is no special recording obligation, e.g. in an asset register (§ 6 para. 2a sentence 4 EStG).
- Low-value assets with purchase or manufacturing costs of 250.01 Euro to 800 Euro (excluding VAT) can be deducted in full as business expenses in the year of purchase, manufacture or introduction or optionally depreciated over the useful life. In this case, the low-value assets must be listed in a special asset register, with the date of purchase, manufacture or introduction and the purchase or manufacturing costs. The register is not required if this information is evident from the accounts. Assets up to 250 Euro no longer need to be listed in an asset register since 2018 (§ 6 para. 2 sentence 4 and 5 EStG).
- For low-value assets with purchase or manufacturing costs of 250.01 Euro to 1.000 Euro (excluding VAT), a collective item can be formed, which is to be dissolved over 5 years with a 20% reduction in profit each year (so-called pool depreciation). The option must be exercised uniformly for all assets of the financial year with purchase costs of more than 250 Euro to 1.000 Euro (financial year-related option). Apart from the accounting entry of the access in the collective item, there are no further documentation obligations. You do not need to keep an inventory list (§ 6 para. 2a sentence 1 and 4 EStG).
- Assets over 800 Euro must be depreciated according to the general rules. The so-called "depreciation for wear and tear" (AfA) can then be deducted each year. However, there is still the option of forming a so-called collective item for costs up to 1.000 Euro and dissolving it linearly over 5 years.
For types of income subject to excess income (employment, rental and leasing, other income), the regulation applies that from 1.1.2018 low-value assets with purchase costs of up to 800 Euro (excluding VAT) can be immediately deducted as advertising costs or optionally depreciated over the useful life (§ 9 para. 1 no. 7 sentence 2 EStG).
Investment grants for assets
If you receive public investment grants for the purchase or manufacture of certain assets, you have the choice as a cash basis accountant: You can
- deduct the grant from the purchase or manufacturing costs of the asset, which reduces the basis for depreciation. This reduction must be made in the year in which the grant is approved, not in the year in which the grant is actually paid (BFH ruling of 29.11.2007, BStBl. 2008 II p. 561).
- tax the grant as business income in the year in which the grant is awarded (BFH ruling of 19.7.1995, BStBl. 1996 II p. 28).
Separate bank accounts
Are you actually required to keep separate bank accounts for business and private transactions? You are not legally obliged to do so, but it is certainly advisable. However, if you only have a mixed account, you must ensure through appropriate records that the origin of the funds received in this account can be clarified (BFH ruling of 12.6.2003, XI B 8/03).
(2023): How does the net income method work?
What is the "Form EÜR"?
Since 2005, the net income method has been standardised (§ 60 para. 4 and § 84 para. 3c EStDV). This means: those using the net income method must complete the official form "Form EÜR" and attach it to the tax return.
Small business owners whose business income (turnover, not profit!) is less than 17,500 Euro gross were not required to fill in the tax form "Form EÜR" until 2016. They could calculate their profit informally by comparing business income and expenses and attach this record to the tax return (BMF letter of 10.2.2005, BStBl. 2005 I p. 320). However, this simplification rule has been abolished from the 2017 tax year. Now, all taxpayers who determine their profit using the net income method are generally required to submit their income tax return and the standardised "Form EÜR" electronically to the tax authorities.
The previous statutory hardship regulation remains in place: To avoid "unreasonable hardship", the tax office may allow the tax return to be submitted to the tax office using the official paper 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 may waive electronic data submission 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 required data set would only be possible at considerable financial expense, 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, tax offices are increasingly handling this more restrictively!
Note: If you do not fulfil your obligation to submit the "Form EÜR", the tax office may threaten and impose a penalty (§ 328 AO). However, the tax office may not impose a late fee because the "Appendix EÜR" is not part of the tax return (OFD Rheinland of 21.2.2006, S 2500-1000-St 1).
The "Form EÜR" requires numerous detailed entries on income and expenses in a strictly formal manner. Completing the now four pages with over 100 lines requires a lot of additional work and knowledge - and often also further costs for professional advice and support.
It is advisable to structure the net income method according to the system of the "Form EÜR" to make the year-end closing easier. You should organise your income and expenses according to the criteria of the form, as this will make it easier to match them to the queries in the form.
(2023): What is the "Form EÜR"?
