What is a donation carryforward?
Donations and, if applicable, membership fees to promote tax-privileged purposes can be deducted as special expenses up to 20 percent of the total income. If your donation exceeds this maximum amount, the excess amount is carried forward to the next year and considered within the maximum amount. This is known as a donation carryforward. The donation carryforward is unlimited in time and continues until the entire donation amount has been offset.
The tax office issues you with an assessment notice each year for the amount not yet taken into account.
What is a donation carryforward?
Loss carryforward and loss carryback: How do they work?
Losses or negative income can be claimed for tax purposes to reduce the tax burden. In principle, losses are first offset against positive income in the same year. If losses remain, there are two options: loss carryback and loss carryforward.
(1) Loss carryback to the previous year
Negative income that cannot be fully offset in the year the loss occurs can be carried back to the previous year. The following limits apply:
- Until 2023: Loss carryback up to 1,000,000 Euro for single persons and up to 2,000,000 Euro for joint assessment.
- For 2020 and 2021: Due to the Corona crisis, the loss carryback was increased to a maximum of 10,000,000 Euro or 20,000,000 Euro for joint assessment.
- From 2022: The loss carryback can now be applied over two years permanently. The amount limits of 10,000,000 Euro or 20,000,000 Euro apply until the end of 2023. From 2024, the old limits (1,000,000 Euro or 2,000,000 Euro) apply again.
Important: The loss carryback must be applied for in the tax return. Since 2022, it is no longer possible to carry back only part of the loss. It is only possible to waive the carryback entirely to use the loss in subsequent years.
(2) Loss carryforward to the following year
Losses that could not be offset after the loss carryback or in the year the loss occurred are carried forward to the following year.
- Up to 1,000,000 Euro (for single persons) or 2,000,000 Euro (for joint assessment) the losses are deducted from the total income.
- Exceeding amounts: For higher loss amounts, only 60% of the remaining total income can be deducted.
Current developments:
- 2024 to 2027: The limit for the exceeding loss carryforward will be increased to 70% to improve tax relief.
- From 2028: The old regulation applies again, allowing 60% of the total income to be used for the loss deduction.
Corona-related adjustments:
Due to the economic impact of the Corona crisis, the following relief measures were introduced for 2020 and 2021:
- Increase in loss carryback: The maximum loss carryback was increased to 10,000,000 Euro or 20,000,000 Euro (for joint assessment).
- Permanent extension of the loss carryback to 2 years from 2022.
Conclusion:
Loss carryback allows losses to be used to reduce taxes from the previous year. Loss carryforward enables losses to be claimed in future years. The current regulation offers greater flexibility and higher limits to account for losses in economically difficult times, such as the Corona crisis.
Loss carryforward and loss carryback: How do they work?
Forward transactions: Is the restriction on loss offsetting unconstitutional?
Since 1 January 2021, strict restrictions apply to the offsetting of losses from futures transactions. These may only be offset against profits from futures and option transactions up to 20.000 Euro per year. Higher losses can be carried forward to subsequent years, but also only up to this maximum amount. Offsetting against other capital gains or income is excluded (§ 20 para. 6 sentence 5 EStG). This regulation was introduced by the Annual Tax Act 2020.
Current Court Decisions
In December 2023, the Rhineland-Palatinate Fiscal Court expressed significant doubts about the constitutionality of this restriction (decision of 05.12.2023, 1 V 1674/23). The Federal Fiscal Court (BFH) also confirmed these concerns. In the case under review, a taxpayer made profits from futures transactions amounting to 250.631 Euro in 2021 but also incurred losses of 227.289 Euro. The tax office allowed only 20.000 Euro of the losses to be offset, with the remaining 207.289 Euro to be carried forward to subsequent years.
Courts are increasingly questioning whether this regulation complies with the principle of taxation according to ability to pay. Taxpayers could be disadvantaged by being able to offset only small parts of their losses over many years.
Relevance of the Federal Constitutional Court
The Federal Constitutional Court is currently examining the constitutionality of loss offsetting in share transactions (Ref. 2 BvL 3/21). A decision in this case could also have implications for futures transactions. If the regulation for shares is deemed unconstitutional, this could also apply to futures transactions.
Divergent Judgments in Case Law
Case law is inconsistent. While the Rhineland-Palatinate Fiscal Court and the BFH express concerns, the Baden-Württemberg Fiscal Court sees no constitutional problems in a ruling from April 2024 (judgment of 29.04.2024, 10 K 1091/23). However, an appeal against this judgment is already pending at the BFH (Ref. VIII R 11/24).
Conclusion: Important Developments for Taxpayers
Currently, the limit for loss offsetting is 20.000 Euro per year. However, upcoming decisions by the Federal Constitutional Court or the BFH could change the situation. Affected taxpayers should closely monitor developments and appeal against their tax assessments to refer to the ongoing proceedings.
Forward transactions: Is the restriction on loss offsetting unconstitutional?
How do loss deduction, loss carryback and loss carryforward work?
Loss deduction, loss carryback and loss carryforward: How it works
Losses or negative income are primarily offset against positive income in the same tax year. This loss offset is first applied within the same type of income and then across different types of income – with no limit. If negative income remains after this offset, it can be carried back to the previous year or forward to subsequent years (loss deduction according to § 10d EStG).
1. Loss carryback to the previous year
If losses remain after offsetting in the year the loss occurred, they can be carried back to the previous year. Since 2013, the maximum limit for loss carryback is 1.000.000 Euro for individuals or 2.000.000 Euro for jointly assessed spouses. In exceptional cases (e.g. due to the coronavirus crisis), the carryback can also be extended to two previous years.
Example: If an entrepreneur incurs losses of 1.5 million Euro in 2023 and made a profit of 800.000 Euro in 2022, they can standardly carry back up to 1.000.000 Euro of the loss to 2022. Since their profit there is only 800.000 Euro, the tax burden for 2022 is reduced accordingly. The remaining 500.000 Euro loss can be carried forward to 2024. If the entrepreneur applies to limit the loss carryback, they could restrict the carryback to 800.000 Euro, increasing the loss carryforward to 700.000 Euro.
Coronavirus-related increases: As part of the coronavirus aid packages, the loss carryback for 2020 and 2021 was increased to up to 10.000.000 Euro for individuals and 20.000.000 Euro for jointly assessed spouses.
2. Loss carryforward to the following year
Remaining losses not offset in the previous year are carried forward to the following year. The loss carryforward is up to 1.000.000 Euro (2.000.000 Euro for married couples). If the loss is higher, the excess amount is only offset against up to 60% of the profit in the following year, so that at least 40% of the income is taxed.
Example: If an entrepreneur incurs a loss of 1.5 million Euro in 2023 and makes a profit of 800.000 Euro in 2024, this profit is fully offset against the loss carryforward. Thus, the taxable income for 2024 is 0 Euro. The unused loss of 700.000 Euro is carried forward to 2025.
Current developments in loss carryforward
From 2024, the limit for offsetting the excess loss carryforward will be increased from 60% to 70% of the remaining income. This regulation is temporary until 2027, after which the old system will return in 2028.
Loss deduction for specific types of income
Special regulations apply to losses from certain types of income. These losses cannot be offset against other types of income, but only within the same type of income.
- Private sales transactions (e.g. speculative gains according to § 23 EStG)
- Other income (§ 22 No. 3 EStG)
- Commercial animal breeding and husbandry (§ 15 para. 4 sentences 1 and 2 EStG)
- Commercial futures transactions (§ 15 para. 4 sentences 3 to 5 EStG)
- Tax deferral models (§ 15b EStG)
Example for private sales transactions: A loss from the sale of shares can only be offset against gains from other share sales, not against income from employment.
Special case: Losses from capital income
- Capital losses cannot be offset against other types of income. They are carried forward, and a carryback to the previous year is excluded.
- Share losses may only be offset against gains from share sales, not against other capital income such as interest or dividends.
Conclusion: Loss deductions help to mitigate financial burdens from losses. You can carry losses back to the previous year or forward to subsequent years. Note that losses from specific types of income can only be offset within the same type. If you have any questions, it is advisable to review the regulations carefully or seek tax advice.
How do loss deduction, loss carryback and loss carryforward work?
