What are investment deduction amounts?
Since 2007, small and medium-sized enterprises have been able to create so-called investment deduction amounts for the planned purchase or manufacture of movable fixed assets. They may deduct an investment deduction amount of 40 percent (until 2019) or 50 percent (from 2020) of the expected purchase or manufacturing costs in the profit calculation. The advance tax saving is intended to facilitate financing (§ 7g para. 1 to 4 EStG).
Requirements: From 2020, the process is simple: In the financial year in which the deductions are to be made, the profit must not exceed 200,000 EUR, without taking into account the investment deduction amounts and regardless of whether the profit is determined by cash basis accounting or by balance sheet accounting. For the creation of investment deduction amounts before 2020, the rules were somewhat more complicated. The following applied:
For businesses using balance sheet accounting (traders), the business assets must not exceed 235,000 Euro (2009 and 2010: 335,000 Euro).
For those using cash basis accounting, the profit must not exceed 100,000 Euro (2009 and 2010: 200,000 Euro) - without taking into account the investment deduction amount. This mainly affects freelancers who can determine their profit using cash basis accounting regardless of a turnover and profit limit, while traders are required to keep accounts from a profit of 50,000 Euro, and therefore the above-mentioned limit for business assets is decisive for them.
For farmers and foresters, the economic value (excluding residential value) or the substitute economic value in the new federal states must not exceed 125,000 Euro (2009 and 2010: 175,000 Euro). For farmers and foresters using cash basis accounting, it is sufficient if either the profit limit of 100,000 Euro or the economic value is not exceeded. Previously, the standard value was decisive, which included both the economic value and the residential value. The economic value is the value of the economic part that belongs to the agricultural and forestry business and is owned by the farmer, i.e. own land that is used or leased, but not leased land. The substitute economic value includes all self-managed land regardless of ownership.
To avoid these negative effects and to increase the liquidity of companies, the deadline for investment deduction amounts, whose three-year investment period expires in 2020, was extended by one year to four years (§ 52 para. 16 EStG, inserted by the "Second Corona Tax Assistance Act" of 29.6.2020). This gives taxpayers who want to invest in 2020 but cannot do so due to the Corona crisis the opportunity to make the investment in 2021 without negative tax consequences (reversal, interest on the tax demand).
Currently, the investment periods according to § 7g EStG are being extended again: For investment deduction amounts whose three-year or four-year extended investment period expires in 2021, the investment period will be extended by one year to four or five years. This means: If the deduction amount was created in 2017 or 2018, the investment period now ends on 31.12.2022 (§ 52 para. 16 sentence 4 EStG, amended by the "Act to Modernise Corporation Tax Law").
The investment periods according to § 7g EStG are being extended again: If the three-year or already extended investment periods expire in 2022, they will be extended by another year to four, five or six years (§ 52 para. 16 sentence 3, 4 EStG, amended by the "Fourth Corona Tax Assistance Act" of 19.6.2022).
What are investment deduction amounts?
When are investment deduction amounts added back?
If the asset for which an investment deduction was made is purchased or manufactured within the 3-year investment period, the following applies (§ 7g para. 2 EStG):
- The investment deduction made for the purchased asset must now be added back to increase profit off-balance sheet. The addition amounts to 40 percent (until 2019) or 50 percent (from 2020) of the expected acquisition or production costs, but is limited to the deducted amount for the asset. The relevant details must be entered depending on the year in which the investment deduction was made.
- The actual acquisition or production costs of the asset are reduced to decrease profit by the previously claimed investment deduction. However, the reduction must not exceed the investment deduction. This reduction amount must be recorded in the accounts and entered in Lohnsteuer kompakt under "Business expenses > Depreciation" in the line "Reduction amounts according to § 7g para. 2 sentence 2 EStG".
Note: If investment deductions were considered in 2017, they must have been invested by 31.12.2020 at the latest - or they must be reversed and interest applied. In many cases, such an investment is now not possible as planned due to the Corona crisis.
To avoid these negative effects and to increase the liquidity of companies, the deadline for investment deductions, whose three-year investment period expires in 2020, is extended by one year to four years (§ 52 para. 16 EStG, inserted by the "Second Corona Tax Assistance Act" of 29.6.2020). This gives taxpayers who want to invest in 2020 but cannot due to the Corona crisis the opportunity to make the investment in 2021 without negative tax consequences (reversal, interest on the tax demand).
Currently, the investment periods according to § 7g EStG are being extended again: For investment deductions whose three-year or extended four-year investment period expires in 2021, the investment period is extended by one year to four or five years. This means: If the deduction was made in 2017 or 2018, the investment period now ends on 31.12.2022 (§ 52 para. 16 sentence 4 EStG, amended by the "Act to Modernise Corporate Tax Law").
The investment periods according to § 7g EStG are being extended again: If the three-year or already extended investment periods expire in 2022, they will be extended by another year to four, five or six years (§ 52 para. 16 sentences 3, 4 EStG, amended by the "Fourth Corona Tax Assistance Act" of 19.6.2022).
When are investment deduction amounts added back?
How is the investment deduction amount settled?
The dissolution of the investment deduction amount has different effects in three possible scenarios:
(1) Actual costs match the projected investment costs:
If the projected investment costs match the actual costs, there are no profit effects in the financial year of acquisition or production when the maximum reduction in acquisition or production costs is utilised. The off-balance-sheet profit-increasing addition can be fully offset by the profit-reducing reduction of the acquisition or production costs of the invested asset.
(2) Actual costs are higher than the projected investment costs:
If the actual costs are higher than the projected investment costs, the maximum possible profit-reducing reduction of the assessment basis exceeds the investment deduction amount taken into account in a previous year. However, there is no profit-reducing expense for the difference, as the reduction of acquisition or production costs may not exceed the investment deduction amount actually claimed.
(3) Actual costs are lower than the projected investment costs:
If the actual costs are lower than the projected investment costs, the maximum investment deduction amount cannot be fully added back, as the addition is limited to 40 percent (up to 2019) or 50 percent (from 2020) of the (lower) investment costs. The remaining balance must be retrospectively recorded as profit-increasing in the original year after the investment period has expired. Interest on the tax demand is calculated at 0.5% per month from the 15th month after the original year (§ 7g para. 3 EStG).
Note: If investment deduction amounts were taken into account in 2017, they must be invested by 31.12.2020 at the latest - or they must be dissolved and interest applied. In many cases, such an investment is now not possible as planned due to the Corona crisis.
To avoid these negative effects and to increase the liquidity of companies, the deadline for investment deduction amounts, whose three-year investment period expires in 2020, is extended by one year to four years (§ 52 para. 16 EStG, inserted by the "Second Corona Tax Assistance Act" of 29.6.2020). This gives taxpayers who want to invest in 2020 but cannot do so due to the Corona crisis the opportunity to make the investment in 2021 without negative tax consequences (reversal, interest on the tax demand).
Currently, the investment periods according to § 7g EStG are being extended again: For investment deduction amounts whose three-year or four-year extended investment period expires in 2021, the investment period is extended by one year to four or five years. This means that if the deduction amount was created in 2017 or 2018, the investment period now ends on 31.12.2022 (§ 52 para. 16 sentence 4 EStG, amended by the "Act to Modernise Corporate Tax Law").
The investment periods according to § 7g EStG are being extended again: If the three-year or already extended investment periods expire in 2022, they will be extended by another year to four, five or six years (§ 52 para. 16 sentences 3, 4 EStG, amended by the "Fourth Corona Tax Assistance Act" of 19.6.2022).
How is the investment deduction amount settled?
