Operational Deductions

Tax law in Germany strictly distinguishes between operational expenses, "Betriebsausgaben", and special expenses, "Sonderausgaben". Some of these special or personal expenses are deductible in full and some only partially. For simplification reasons, the distinctions of the special expenses will not be extensively discussed here. Your tax attorney or tax adviser will professionally deal with this. The difference between both kinds of deduction is that only income-related expenses can create a negative result for taxation. Sonderausgaben do not create negative income. A typical example will be if you are laid off. You have no income but expenses for job applications. These application costs can give you negative income. Supposing you are doing your taxes yourself, then just claim all special deductions in full and let the tax office do the subtracting. This is a lean but mean approach – but legal.

As I understand, my taxable income is the difference between income minus operational expenses. What are these?

Generally, expenses for traveling to work (single / monthly / yearly public transportation tickets, or car mileage [after deducting private mileage]), books, equipment, further education etc. can be deducted. It also depends on what your profession is and how you present it to the tax office. A sports teacher, for example, might have a problem deducting a computer but not an English teacher. Glasses for computer work (computer-glasses) are normally not deductible because glasses are typical private expenses (medical costs). But you could ask your boss to reimburse you for the glasses and the reimbursement will be tax-free if an eye test shows that you need the glasses to work effectively at the computer (BMF, Letter of February 3, 2000, IV C 2 – S 2144 – 10/00).
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Commuting by car daily to and from office. Are these costs deductible?

Generally, yes. However, the costs of private life are not deductible. You have two methods to deduct the private share of motorization costs. You may subtract 1% of the list price (Listenpreis) as a flat coverage of your private share in the care or keep a logbook and then deduct the real costs.
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How is this “list price” determined?

The list price is the domestic price of a car at the date of its first registration. You can deduct, following this method, 0.03% of the list price for each calendar month. This will only be problematic if you got yourself a used car. Your tax attorney or tax consultant will have this information.
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What constitutes a log-book?

Should you decide to keep a logbook, you must detail all trips with date, mileage and reason of travel. If you are traveling privately, just put in “private” and that suffices. The tax authority has no right to demand knowledge of your private life! There are forms available in stationary shops. You have to use a driver’s logbook to determine the actual costs for deduction.
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I read somewhere that there are many exceptions in tax law. What are the most important exceptions of deductible operating expenses?

They are written in §4 V EStG:

  1. Presents to non-employees which do not exceed € 35 per person during the whole year. N.B. You must keep a list on who gets what.

    2.) Entertainment expenses up to 70% of that what can be commonly considered as appropriate. The amount and operational motive are to be proved in writing in an obligatory format. Seeing it practically, normally you will only have write on the bill of the restaurant the persons who you dined and wined, and wardrobe fees/tip since better restaurants take care to meet these requirements set up by law. The lawful requirements are: name and address of restaurant, date of entertainment, kind and amount of service, billing amount, names of persons dined and wined. N.B.: The restaurant’s bill must be machine-made and machine-registered – otherwise the amount cannot be deducted at all.
  2. Additional expenses for food during domestic business trips. For each day that you are away, you can deduct for a period up to 14 hours but more than 8 hours € 6, for a period from 8 to less than 14 hours € 12 and for 14 up to 24 hours € 12 and for 24 hours € 24. No flat sums for accommodation expenses can be deducted, only the really accrued costs. Additional expenses for operationally motivated keeping of a double household, as long as the double household is kept for more than two years at the same place.
  3. Additional expenses for food during foreign business trips will de deducted according to a special table.
  4. You can deduct as traveling costs with your own motor vehicle to the positive difference between 0,03% of domestic list price at the time of first registration per distance kilometer between home and your business site; and only 0,02% for visiting home while having a double household. € 0,40 by use of motorbike per kilometer of the distance between home and business site/work. The distance between home and business site has to be the shortest usable distance.
  5. Expenses for a working room at home and the costs for its furnishing can be deducted up to € 1,250. This applies only if the operational or professional use of the working den is less than 50% of all operational or professional activities or if no other place can be provided as a working den. If you use this room to 100% for professional purposes then you can deduct these costs in full.
    N.B. The tax office is pretty picky about home offices!
  6. Operating expenses, which also affect private living, whenever they are commonly considered as inappropriate. It has practical relevance for very expensive things like pieces of art, oriental carpets.
  7. Fines, penalties in money from courts or authorities of Germany or organs of the EC are not deductible at all. Interest on evaded taxes according to §235 AO are not deductible at all.
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Let us give you some numbers as an example for the above.

1.) Let us say you wined and dined for € 100 (excluding VAT, tips etc.). This means you can deduct as net expenses € 70. The remaining € 30 on net expenses cannot be deducted at all and will be considered as a fictive income (Eigenverbrauch or own consumption). If you received a handwritten “Quittung über Essen und Getränke” just throw it away after having left the restaurant. You cannot use it for taxation purposes.


2.) While traveling to meet some customers you were so hungry you virtually ate twice as normal or in a number € 40. It does not matter if you even spent € 100, you can only deduct the statutory rate. Period.


3.) This is a typical example of how complicated German tax law can become. The choice is either between the legal fictive or actual calculation. Actual computation of your vehicle costs means putting all occurred costs into relation with the professional mileage. To determine the mileage you are to keep a driver’s logbook showing the mileage at begin, end, date reason, and destination of your trip’s course. If you are “lazy” or do not want to go into that trouble of documenting all expenses, you can use the 1% rule. Both alternatives are equally legal.


4.) If you work in a home office, you can deduct your “office”. This separate room in your apartment may not be between two other rooms and may not be furnished with a bed and/or closet. A couch (for “relaxing”), however, is okay. You must be doing your business at the minimum of 50% in that room. Translators, journalists, piano teachers typically can have an office at home – but only as a second room. These persons can deduct 100% of the room costs if they have no other place to do their work.
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I just bought some new expensive items, like a car for my business and also for private reasons. I still have my ol’ jalopy. Do I now understand correctly that I can deduct my new car totally?

Sorry, you are wrong for several reasons. Since a car is a long-term asset, you can only write it off during the usual years of usage. Long-term assets are such that will remain more than a year in the company. By having this car as professional property you will have the disadvantage of having a lot of own consumption meaning fictive income. It might be a good idea to keep this car as private (and not professional) property and only deduct the real professional use. Discuss this with your tax attorney or consultant!
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Inferior Assets and Depreciation – at a glance
 
Old Rules Until
December 31, 2007
New Rules Since
January 1, 2008
immediately deductible in full
Assets with sales price or production costs up to € 410 (net)1
Assets with sales price or production costs up to € 150 (net)
in the „pool“ – i.e. to be deducted over a period of 5 year
N/A
Assets with sales price or production costs from € 150 to €1,000 (net) 2
according to depreciation table, deduction over a certain period of years
Assets with sales price or production costs above € 410 (net)3
Assets with sales price or production costs above €1,000 (net)
1 = must be accounted separately as “geringwertiges Wirtschaftsgut = GWG”
2 = must be accounted separately as “pooled”
3 = to be accounted as: Anlagevermögen
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