Anyone moving to Germany is subject to paying tax on any earned income. But the good news is that if you’re self-employed (Selbstständige) you can enjoy a variety of reductions (Steuerminderungen) if you properly fill-in your tax declaration (Steuererklärung).
In case you’re self-employed and living in Germany, it’s your responsibility to submit your income declaration at the end of the tax year. But to benefit from maximum reductions you should understand what expenses are tax-deductible for the self-employed. First, you must save all your receipts (Belege) but also understand what type of flat-rate expenses, known as Pauschalen, you can use and in what conditions.
So, we’ll break down the flat-rate allowances (Pauschbeträge) in Germany, provide tax tips (Steurtipps) and show what expenses can be deducted.
What Expenses Can a Self-Employed Person Deduct?
Before making new acquisitions, you should consider whether you can prove a clear relationship between the item of purchase and its purpose for use in business activities, especially for items which you could also use personally. It’s the only way in which you can deduct the purchase costs (Anschaffungskosten). So, keep all relevant documents which you could use as evidence. For example, regarding goods for which you paid cash, to receive a tax deduction, you must submit proof. But, consider that sometimes the tax office will either postpone or deny tax deductions for high values of paid cash.
How to Use Depreciation
Consider depreciation before you incur business costs (Betriebsausgaben). It can be viewed as a form of tax optimization. When your asset depreciates, your owed annual tax proportionally decreases in value. So, you can minimize your tax base.
However, you can’t always deduct a depreciated asset. Consider whether you’re dealing with a conventional depreciation, a low-value assets depreciation (geringwertiger Wirtschaftsgüter – GWG) or a collective item. Any purchases at values of up to €800 are considered low-value assets. You can deduct these acquisitions through a one-time-only simplified deduction. However, for assets of over €800, the German Finance Department offers up-to-date information to help determine the length of the deduction period for the asset. Take, for example, laptops and notebooks which can be fully deducted after a period of 3 years.
How to Benefit from Flat-Rate Tax Allowances
Aside from cost deductions (Kostenabsetzungen ) and depreciation you can also benefit from flat-rate tax allowances (Pauschalen). Although the tax office automatically deducts some taxes, you must specify others in your tax return, known as Steuererklärung.
Usually, you don’t need proof when you claim a flat-rate tax allowance. However, if the level of your expenses is over the flat-rate value, you must claim it instead and submit proving documents.
The Investment Deduction Value (Investitionsabzugsbetrag)
In Germany, if you’re an entrepreneur holding assets in value of maximum €235,000, you can enjoy an additional tax deduction. If you’re aware of the price of the movable assets which you will purchase, you can benefit from the investment deduction amount (IAB) in your present tax return (prior to the actual acquisition) up to a level of 40% of the total tax-deductible value. But you must make the purchase within a maximum period of 3 years or you risk incurring high tax back payments.
Costs Which You May Deduct When You’re Self-Employed
Every business activity is different and some costs which you may write off, might not be easily recognized as deductible for another business. So, consider that you must prove the relationship between the costs incurred and the nature of your business.
The deductible expenses which may be incurred by a self-employed person include, but are not limited to:
- employee benefits
- amortization and depreciation ( Abschreibungen)
- loans (Darlehen)
- hospitality expenses (Bewirtungskosten)
- business trips (Geschäftsreisen)
- gifts, investment deductions (Investitionsabzüge)
- taxes (Steuern)
- wages & salaries (Lohn- und Gehaltszahlungen)
- rent (mieten)
- inventories (Warenvorräte)
- vehicle costs (Kfz-Kosten)
How to Deduct a Workroom/Office and Rent When You’re Self-Employed
When you’re self-employed and you have a home office you can claim a tax deduction. However, the value which can be deducted depends on how you use that room. When you use the room for both professional and private purposes, and you have a separate available room, then tax deduction doesn’t apply. However, if you only carry out business activities from the respective room and you don’t have another room available, then you can deduct a maximum of €1,250 yearly as business costs. You can also deduct other workroom related costs aside from rent including:
- Interest (Zinsen);
- Building deductions or rent, which are known as Miete oder Gebäudeabschreibungen;
- Repair Costs (Reparaturkosten);
- Waste disposal (Müllabfuhr);
- Home insurance contributions, known as Hausversicherungen;
- Renovation and Maintenance, known as Instandhaltung und Renovierung;
- Property Tax (Grundsteuer).
In the case of co-working spaces, if you’re self-employed you should submit floor plans of the building to allow the tax office to make the required calculations regarding rent and utility values which you can deduct.
Equipment Costs Which You Can Deduct
Because each profession is different, the equipment used for business activities varies. So, if you’re a self-employed person, you can deduct a wide variation of office equipment from utensils to post-its. But, consider that 90% of the tax-deductible working materials should be used for business purposes. For example, you can deduct costs related to devices and machinery, software, mobile phones, office furniture, work attire, tools, specialist literature or business accessories.
Can I deduct the Company Car if I’m Self-Employed?
Yes, when you’re a self-employed person you can deduct your company car. However, you must show proof of at least 90% of commercial use to save deduct as much as possible from tax. And, if you exceed 90%, then all related expenses can be deducted as income costs comprising interest, insurance, and fuel. Also, you can travel expenses, but you must maintain a logbook. However, depending on the distance which you must travel to reach your workplace, you could consider purchasing the vehicle on your name as a natural person and billing the mileage towards travel allowance. And, if your car’s main use is professional, you could also apply the 1% rule so you may deduct your private trips.
Are Education and Training Costs Tax Deductible?
Yes, in case you’re a self-employed person you may deduct a maximum of €4,000 annually but only if the training/ education is directly related to your activity.
Can I Deduct Health Insurance?
Yes, you can deduct the basic coverage (Basisversorgung) from tax. However, you cannot deduct optional benefits and tariffs.
But, if you’re paying a private health insurance company, you’ll receive a receipt from your insurer which states the deductible value. German Health insurance is classified as a special expense, known as Sonderausgabe, in your tax return. However, there’s an upper limit for pension expenses, respectively €2,800 because, as your own employer, you’re co-financing your employee contribution.
Can I Deduct My Hospitality Expenses?
Yes, because the tax office is aware that most self-employed persons have meetings during a meal, you’re granted entertainment costs. However, you must submit supporting documentation so you may deduct a maximum of 70% of the expenses. The receipts must show the location, occasion and who attended the business meal.
However, if you’re a self-employed person, you can also deduct your meals during business trips which last more than 8 hours/ day. Depending on your trip’s duration, specific flat-rate allowances are available, which are updated yearly. These allowances are also applicable for hotel accommodation during trips abroad. So, consider checking the updated information before you leave on your trip.
About Compensation Expenses
You can claim compensation expenses as business costs in certain conditions such as
- Contract infringement on taxable income;
- A breach of a non-competition clause, known as Wettbewerbsverbot;
- Damage of property cause by any employee;
Can I Deduct Birthday Parties and Company Outings?
For company outings, you can benefit from an allowance of up to €110 per each employee. However, in the case of an employees’ birthday party, it depends on whether it’s a professional event meant to develop a good office culture. In this case, you can deduct costs partially.
Additional Items Which You May Deduct When You’re Self-employed
Being a self-employed person, you may also deduct promotional gifts and donations, severance pay, account fees, costs for creating and managing online business sites, contributions to professional associations and certain job-related insurance fees.
Although some tax allowances are established at a fixed level, you can deduct other expenses separately. However, your best approach is to contact your tax adviser in case you’re not sure about individual items which are tax-deductible for self-employed persons.
Germany offers a wide range of tax deductions for self-employed persons to improve and promote the development of its business environment.
Being self-employed in Germany offers you increased benefits such as deductions on depreciation, rent/ workroom, company car expenses, training and education costs or healthcare insurance expenses.
However, you can also deduct certain hospitality and travel costs which are strictly related to your business. In most cases you must submit supporting documentation to the tax office including the specific details for each item as required.
The tax deduction benefits you can enjoy in Germany when you’re a self-employed person depend on your filling-in your annual tax return properly. So, to be completely certain about what’s tax deductible for self-employed persons, you should always consult with a tax advisor on filing your yearly tax return form.