Should operating income be stated net or gross?

Business income must be stated at net value - that is, excluding VAT. The VAT applicable to this must be entered separately.

An exception applies to small businesses that do not show VAT in accordance with § 19 UStG: They state their business income at the invoice amount.

Business income must be declared in the year it was received. Regularly recurring business income belongs to the relevant year even if you receive it within 10 days before or after the end of the year.

Business income that is income tax-free does not need to be entered in the "Form EÜR" due to lack of query. This includes, for example:

• for start-ups, the start-up grant,
• investment allowance,
• tax-free portion of dividends from shares held as business assets. The taxable half of the dividends must be entered in the line "VAT-free, non-VATable business income".

Expense allowances from a privileged part-time activity remain tax-free:

• up to 3.000 Euro if you have a part-time job as a trainer, instructor, educator, etc., e.g. as a conductor, choir leader, trainer, teacher at an adult education centre or IHK, trainer at the fire brigade or DRK (so-called trainer allowance according to § 3 No. 26 EStG).
• up to 3.000 Euro if you work as a legal guardian, custodian or carer (so-called carer allowance according to § 3 No. 26b EStG).
• up to 840 Euro if you carry out other voluntary work in the non-profit sector, e.g. as an official, board member, fire brigade equipment manager, equipment manager (so-called volunteer allowance according to § 3 No. 26a EStG).

Note: In the past, tax-free income and related business expenses were not queried, with some exceptions. This has now changed. Now, for example, expense allowances for trainers or volunteers (§ 3 No. 26, 26a, 26b EStG), start-up grants (§ 3 No. 2 EStG) or restructuring income (§ 3a EStG) must be stated under business income. If or to the extent that this income is tax-free, it must be entered in lines 91-93, i.e. the initially declared (tax-free) business income is deducted here. If applicable, the trainer allowance of 3.000 Euro or the volunteer allowance of 840 Euro must be entered if no higher business expenses are claimed.

Should operating income be stated net or gross?

What options do I have with the small business regulation?

Option for the small business regulation

You can opt for the small business regulation under § 19 para. 1 UStG if your gross turnover in the previous year did not exceed 22,000 Euro and is not expected to exceed 50,000 Euro in the current year. If you choose this regulation, the following conditions apply:

• No VAT may be shown separately on your invoices.
• No VAT is to be paid to the tax office.
• The VAT shown on incoming invoices cannot be claimed as input tax.
• For invoices up to 250 Euro, the VAT rate must not be stated.

Important note: An unauthorised statement of VAT obliges you to pay it to the tax office. The recipient of the invoice may not deduct this tax as input tax.

Option for standard taxation

Alternatively, you can waive the small business regulation and opt for standard taxation to use the input tax deduction. This waiver is binding for five years. Then enter your turnover, VAT received, input tax paid, and VAT paid in the „Form EÜR“.

Waiving the small business regulation is advantageous if:

• You plan larger investments or have high material costs (e.g. in the start-up year). In this case, you can deduct the VAT on incoming invoices.
• You mainly provide services to companies, as they consider VAT a pass-through item and are not burdened by higher costs.

Formal obligations for small businesses

Small businesses must also include the tax number or VAT identification number and a consecutive invoice number on their invoices.

Changes from 2024

From the 2024 tax period, the obligation to submit an annual VAT return will be waived unless explicitly requested by the tax office. This exemption only applies to small businesses that have not opted for standard taxation. The waiver of the small business regulation can now be declared up to two years after the relevant tax year.

Increase in turnover limits from 2025

From 2025, the turnover limits for the small business regulation will be increased:

• The previous year's turnover may not exceed 25,000 Euro.
• The current year's turnover is not expected to exceed 100,000 Euro.

These new limits apply retroactively from 2024. However, the Bundesrat must still approve the planned change.

Reverse charge mechanism under § 13b UStG

For certain industries, such as construction, the reverse charge mechanism applies. Here, the tax liability is transferred to the recipient of the service. This particularly affects work supplies and construction services.

• If you are a building contractor or tradesperson receiving construction services, you pay the VAT directly to the tax office and not to the service provider. Therefore, they do not charge you VAT (§ 13b para. 1 no. 4 UStG).

Special features for small businesses under § 19 UStG

• Service recipient (construction services): If you work as a tradesperson and receive construction services, you must pay the VAT for these services to the tax office, even if they are for your private residence (§ 13b para. 5 UStG). In this case, enter the VAT in your tax return.
• Service provider: If you provide construction services yourself, no VAT is due for the recipient of your service (§ 13b para. 2 sentence 4 UStG).

What options do I have with the small business regulation?

How can I correctly determine the private use value of my company car?

If the business use, including journeys between home and business and for trips home as part of maintaining a second household

• is more than 50%, the vehicle automatically becomes part of the necessary business assets.
• is between 10% and 50%, you can choose whether to allocate the vehicle to business assets or private assets (discretionary business assets).
• is less than 10%, the vehicle is considered necessary private assets.

For a vehicle allocated to business assets, you can record all costs in full as business expenses and deduct them for tax purposes. Business expenses also include costs incurred for private journeys and journeys between home and business premises. However, a correction is made for these journeys:

• For private journeys, a private usage value must be taxed, i.e. recorded as business income. Additionally, VAT is calculated on this usage value and added to business income.
• For journeys between home and business and for trips home as part of maintaining a second household, the total costs are proportionately reduced. In return, these journeys are deducted as business expenses using the travel allowance.

The private usage value can be determined

• (1) using the flat-rate method, if the business usage share is more than 50%.
• (2) using the logbook method.
• (3) using the partial value, if the business usage share is less than 50%.
• (4) Additionally, cost capping may apply when using the flat-rate method.

How can I correctly determine the private use value of my company car?

Private use of company car: (1) Flat-rate method for business use

Private vehicle use: Flat-rate method for business use

The 1% method, also known as the flat-rate method, can be applied to vehicles used for business purposes more than 50% of the time. The private use value of the vehicle is determined based on the gross list price, without recording the actual private use. This method is particularly simple as no logbook is required. However, depending on the vehicle and usage behaviour, it may be advantageous or disadvantageous compared to the logbook method.

Example: A business owner uses a vehicle with a gross list price of 30.000 Euro for more than 50% business use. The private use share is determined using the flat-rate method:

• 30.000 Euro x 1% = 300 Euro per month.
• For 12 months, the annual use value is 3.600 Euro (300 Euro x 12 months).

Accident costs and monetary benefit

Previously, accident costs incurred during a private trip were covered by the flat-rate use value. However, since a ruling by the BFH (dated 24.5.2007), this is no longer the case. If the employer waives reimbursement of such costs, this is considered an additional monetary benefit for the employee or business owner and must be taxed accordingly.

Example: A business owner has an accident during a private trip with the company vehicle, resulting in repair costs of 1.000 Euro. The employer covers the costs. Since this is no longer covered by the flat-rate use value, this amount is added as a monetary benefit to the taxable income.

VAT on private use value

The private use value determined using the flat-rate method is also subject to VAT (§ 3 Abs. 9a Nr. 1 UStG). Since not all vehicle costs are subject to input tax, such as vehicle tax or insurance, the determined use value can be reduced by 20% before VAT is calculated.

Example: A vehicle has a list price of 30.000 Euro and the private use value determined using the flat-rate method is 3.600 Euro per year. Since not all expenses are eligible for input tax deduction, the amount is reduced by 20%:

• 3.600 Euro - 20% = 2.880 Euro.
• VAT is calculated on this amount: 19% of 2.880 Euro = 547.20 Euro.

This amount is to be entered in the line “Collected VAT and VAT on gratuitous value transfers” in the VAT return.

Special regulations for electric and hybrid electric vehicles

There are special regulations for electric and hybrid electric vehicles that particularly favour the flat-rate determination of the private use value. For vehicles purchased or leased between 1.1.2019 and 31.12.2030, reduced rates apply.

Electric vehicles until 2030

For electric vehicles with no carbon dioxide emissions and a gross list price of no more than 60.000 Euro (from 2024: 70.000 Euro, from July 2024: 95.000 Euro), the private use share is set at only 0.25% of the quarter list price.

Example: A business owner purchases a pure electric vehicle in 2023 with a gross list price of 50.000 Euro. Since the vehicle is emission-free, the monthly private use share is only 0.25% of the quarter list price:

• Quarter list price: 50.000 Euro ÷ 4 = 12.500 Euro.
• Private use value: 12.500 Euro x 0.25% = 31.25 Euro per month.
• This results in 375 Euro per year as the private use value.

Journeys between home and workplace

In addition to the private use value, a surcharge for journeys between home and workplace is calculated. This surcharge is usually 0.03% of the list price (for electric vehicles halved or quartered list price) per kilometre and month.

Example: A business owner drives 10 km to work daily. The list price of the vehicle is 40.000 Euro. The following surcharge is calculated for journeys to work:

• 40.000 Euro x 0.03% x 10 km = 120 Euro per month.
• This results in 1.440 Euro per year as a surcharge for journeys between home and workplace.

Hybrid electric vehicles: Reduction of benefits

There are also tax advantages for externally chargeable hybrid electric vehicles, which will be gradually reduced in the coming years. Certain minimum requirements for electric range or carbon dioxide emissions must be met to benefit from the advantage.

• Until 2021: The half assessment basis applies if carbon dioxide emissions are a maximum of 50g/km or the electric range is at least 40 km.
• From 2022: The electric range must be at least 60 km.
• From 2025: The electric range must be at least 80 km to continue benefiting from the advantage.

Example: A business owner purchases a hybrid electric vehicle in 2023 with a range of 55 km and a list price of 45.000 Euro. Since the range does not reach the 60 km limit, the full assessment basis applies from 2025, meaning 1% of the full list price is used as the private use value:

• 45.000 Euro x 1% = 450 Euro per month.
• This results in 5.400 Euro per year as the private use value.

Compensation for disadvantages in old cases

For electric and hybrid electric vehicles purchased before 1.1.2019 or not meeting current requirements, there is a so-called disadvantage compensation. In this case, the list price is reduced by flat-rate amounts for the battery system.

Example: A vehicle purchased in 2013 has a battery capacity of 20 kWh. The list price is reduced by 500 Euro per kWh, but by a maximum of 10.000 Euro. In this case, the deduction is:

• 20 kWh x 500 Euro = 10.000 Euro.
• The reduced list price for calculating the use value is therefore:
• Original list price: 50.000 Euro - 10.000 Euro = 40.000 Euro.

Private use of company car: (1) Flat-rate method for business use

Private vehicle use: (2) logbook method

With the logbook method, the value of private use can be calculated using the actual costs proportionate to private journeys. The taxable value of use is the part of the total costs for the company car that corresponds to the proportion of private journeys in the total mileage. To determine the private use percentage, you must keep a "proper" logbook in which all journeys are recorded without gaps. Enter the calculated value of use.

Private use value = Total costs x Private use percentage

Private use percentage = Kilometres driven privately (according to logbook) : Total mileage x 100

Note: Kilometres driven privately do not include journeys between home and work or journeys home as part of maintaining a second household.

Example: You drive 25,000 kilometres a year with the company car, of which 10,000 km are for private journeys according to the logbook. The total costs are 8,000 Euro (excluding VAT) per year.

The private percentage is: 10,000 km : 25,000 km x 100 = 40 %
The private use value is: 40 % of 8,000 Euro = 3,200 Euro.

The private use value determined using the logbook method is also subject to VAT (§ 3 Abs. 9a Nr. 1 UStG). You can deduct costs not subject to input tax from the total costs in the proven amount and only calculate VAT on the reduced value of use.

Costs not subject to input tax include operating costs such as car insurance, car tax, broadcasting fee, garage rent, ADAC membership, and costs incurred abroad. Interest on loans is also included. Depreciation is also included if no input tax deduction was possible on the purchase costs, e.g. when buying privately or transferring from private assets.

Please note that there are special regulations for electric and hybrid electric vehicles. In accordance with the halving or quartering of the assessment basis in the 1% flat-rate method, the depreciation (AfA) to be taken into account must be halved or quartered. If you use a leased or rented vehicle, the leasing or rental costs must be halved or quartered accordingly. This applies to the purchase or leasing of an electric or hybrid electric vehicle between 1 January 2019 and 31 December 2030. 

The exact regulation has unfortunately become very complex.

The Federal Fiscal Court has recently confirmed that with the logbook method, documentary evidence of costs must be provided without exception. An estimate of expenses not proven by documents - in the case of the court ruling, fuel costs - excludes the use of the logbook method (BFH ruling of 15.12.2022, VI R 44/20).

Private vehicle use: (2) logbook method

Private use of company car: (3) Pro rata value for business use of less than 50%

If the vehicle is used less than 50% and more than 10% for business purposes, it can still be allocated to discretionary business assets. However, since 2006, private use must be calculated and taxed using the so-called partial value (§ 6 para. 1 no. 4 sentence 2 EStG).

This means: The value of private use is based on the proportionate actual costs - as with the logbook method. However, the business or private usage share does not need to be proven with a "proper" logbook and its strict conditions, but can be credibly demonstrated with informal records. As with the logbook method, enter the usage value in line 19 and the corresponding VAT in line 16.

Private usage value    =   Total costs  x  Private usage share

Private usage share  =   Kilometres driven privately (according to records)  :  Total mileage  x  100

This is how you determine the partial value:

• First, add up all vehicle costs, e.g. depreciation, insurance premiums, fuel (petrol, diesel, petrol costs, fuel costs, fuel receipt, tank filling, refuelling, fuel costs), vehicle tax, inspection and repair costs, etc. These are deductible as business expenses.
• Then determine the private usage share by comparing the kilometres driven privately to the total mileage.
• Finally, multiply the total costs by the private usage share. The value thus determined represents the withdrawal value that must be taxed.
• Since the 1% method no longer applies, journeys between home and work can no longer be deducted at 0.03% of the list price, nor can journeys home as part of dual household management be deducted at 0.002% of the list price from the total costs. Instead, the total costs must be reduced by the proportionate costs for these journeys. In return, the distance allowance can be deducted as business expenses.

Private use of company car: (3) Pro rata value for business use of less than 50%

Private vehicle use: (4) Cost capping with the flat-rate method

When applying the 1% flat-rate method, it may occur that the value of private use is higher than the actual vehicle costs. This is particularly possible if the vehicle has already been depreciated and therefore no depreciation can be applied, if it is a used vehicle, or if the vehicle is leased. In this case, cost capping may be considered (in line 19).

• Actual costs include ongoing operating costs, depreciation, and interest on loans.
• The total actual costs are first reduced by the travel allowance for journeys between home and work, as this deduction is generally available to you.
• The remaining amount of the total costs is then compared with the flat-rate usage value and applied as cost capping.

Example:
For a company car with a list price of 40.000 Euro (including VAT), total costs of 6.000 Euro were incurred. The car was used on 200 days for journeys between home and work (distance 20 km).

VAT: In the case of cost capping - if the private usage value according to the flat-rate method is limited to the total costs - you do not need to use the total costs as the basis for VAT, but proceed as follows:

• First, deduct the costs that were not subject to input tax from the total costs. These are operating costs such as car insurance, vehicle tax, broadcasting fee, garage rent, ADAC membership fee, and costs incurred abroad. Interest on loans is also included. Depreciation is also included if no input tax deduction was possible on the purchase costs, e.g. when buying from a private individual or transferring from private assets. What remains are the total costs with input tax.
• Then determine the private usage share. You may estimate this based on suitable documents. If such documents are not available, you must set the private usage share at a minimum of 50%. Journeys between home and work are not considered private but business-related.
• Finally, apply the total costs with input tax at the private usage share as the basis for VAT, and calculate 19% VAT on this.

Example:

Note: Some cash-basis taxpayers previously used the following tax model: They leased their company car, made a high special leasing payment in the first year, fully deducted it as a business expense, and then determined the private share using the 1% rule in the following years. Due to the so-called cost capping, this often resulted in an extremely low private share for car use.

After the tax authorities and some tax courts had already rejected the model, the Federal Fiscal Court has now also denied recognition of the tax model (BFH rulings of 17.5.2022, VIII R 11/20, VIII R 21/20, VIII R 26/20). The following example illustrates the problem:

A freelancer leases a car with a gross list price of 120.000 Euro, starting in December 2015 (term 36 months). In the first year, a special payment of 30.000 Euro plus VAT is agreed. The monthly leasing rates are then only 350 Euro plus VAT. The freelancer calculates his profit using the cash method and fully deducts the special leasing payment in 2015 as a business expense. In 2016 and 2017, he chooses the 1% rule and would therefore have to tax 1% of the gross list price monthly (annually 14.400 Euro) as a private withdrawal. However, he applies the cost capping and only taxes a private share of, for example, 6.000 Euro per year. This arrangement was regularly accepted by many tax offices in the past. However, at some point, the tax authorities found it "too much", as more and more self-employed individuals were exploiting it for tax purposes. As a result, the tax authorities decided not to accept the model further (OFD Karlsruhe, VASt Aktuell 6/2018 of 1.8.2018; decree of the Hamburg tax authority of 8.11.2018, S 2177- 2018/001 - 52).

For the example mentioned, this means: The special leasing payment must be distributed over the term for the cost capping check. Therefore, in 2015, only 1/36 of the special leasing payment is to be included for cost capping purposes. In 2016, 12/36, in 2017 also 12/36, and in 2018 11/36 of the special leasing payment are to be applied. The cost capping in 2016 would therefore not be 6.000 Euro, but 6.000 Euro + 10.000 Euro = 16.000 Euro, so 14.400 Euro would be taxed as a private share. To avoid misunderstandings: The special leasing payment itself usually remains deductible as a business expense when paid; this is only about the cost capping.

The Federal Fiscal Court considers the tax authorities' view to be correct. The cost capping regulation may be interpreted in the sense of the tax authorities. Any taxpayer who uses a company car for private purposes can also avoid the 1% rule by keeping a logbook.

Private vehicle use: (4) Cost capping with the flat-rate method

How is private use of a telephone correctly taken into account?

If you fully deduct telecommunications expenses, such as telephone, fax, and internet, as business expenses, you must determine the private usage share and record it as business income, as well as pay VAT on it.

The valuation of private withdrawal is based on the so-called partial value (§ 6 Abs. 1 Nr. 4 EStG). Here, partial value refers to the actual cost price. However, as it is very difficult to precisely quantify the extent of private use, the proportionate telephone costs can be estimated (OFD Koblenz dated 10.1.2002, S 2121 A). In Baden-Württemberg, for example, the tax authorities use a guideline value of 360 Euro per year for the private telephone share.

Alternatively, in our opinion, it is possible to only enter the business share of the telephone costs as business expenses and to completely forgo an entry under business income.

Traders, freelancers, and farmers are at a significant disadvantage compared to employees regarding private telephone use. For employees, the use of business telephones, fax machines, computers with internet is tax and social security-free, regardless of the extent of private use (§ 3 Nr. 45 EStG). Unfortunately, this generosity of tax exemption does not apply to the self-employed.

The tax authorities believe that applying this exemption provision would open up the possibility of deliberately shifting private expenses into the tax-relevant business area, thereby obtaining unjustified tax relief (BMF letter dated 6.5.2002, DStR 2002 p. 999). This view has been confirmed by the BFH (BFH ruling dated 21.6.2006, XI R 50/05).

Since 2015, municipal office holders (council members, district councillors) are better off if the district or municipality provides them with tablet PCs or similar devices: From 2015, the private use of data processing and telecommunications devices is also tax-free for persons performing voluntary public service and receiving an expense allowance from public funds in accordance with § 3 Nr. 12 EStG (§ 3 Nr. 45 Satz 2 EStG).

How is private use of a telephone correctly taken into account?

How should private withdrawals of goods be valued?

If you withdraw business goods and fixed assets for private purposes, please state the corresponding book value. The same applies to non-cash benefits to employees of the company, unless they are tokens of appreciation with a value of less than 60 EUR. 

In certain industries, the withdrawal of foodstuffs for private consumption can be calculated using flat rates. These are announced by the tax authorities and eliminate the need to record a large number of individual withdrawals. The flat rates are annual values for one person. For children up to the age of 2, no flat rate is applied; up to the age of 12, half of the respective value is to be applied.

How should private withdrawals of goods be valued?