Deductions - the seductive optioning of goods and services used for business that we are all accruing over the course of the year. This can also be one of the pitfalls of being a business owner or freelancer, especially when the overheads are low. No matter how certain you are that you definitely needed that particular book about artisanal ravioli for your freelance aerosol business, convincing the Finanzamt of this might be another thing altogether. This is where it gets tricky - of course, we all have the right to bring down our taxable income based on the expenditures we made within our business - but as with all things finance and freelance in Germany: play by the rules.
In general, Germany is quite respectful when it comes to formulating its broad listing across deductibles and it is indeed the one hope you will have as you immerse in the world of Finanzamt paperwork, spreadsheets and crinkled receipts. First of all, let’s establish that as a freelancer or self-employed person you will have: a gross revenue, VAT taxes, other taxes (covered here) and expenses and then - you have deductions - which essentially offset your revenue/profit/loss, and what remains is your taxable income to which a tax rate will be applied. So, it is super important this is all spot on!
To start, here is a long list of things that are deductible:
- Public transport
- Tickets to films, events, festivals, workshops relevant to your work
- Books, magazines and literature relevant to your work
- Hardware, software, other gear used in your work
- Gear hire eg. camera gear
- German classes
- Phone bills
- Website operation costs
- Work trips: travel and accommodation
- Gifts for clients: one gift per client per year, up to 40 EUR
- Meals with clients, interview subjects, etc.
- Office costs: rent and bills
When it comes to receipts, it’s always important to leave clear notations on what the expense is for, how it was paid, when it was paid and any additional information. For example, a lunch expense will require notes on who you met with, and why. Similarly, transport claims such as hire cars or drivers must include the start and end location, alongside the purpose. While it can be helpful to have an electronic receipt tracker, jotting alongside the paper receipt, attached to plain paper, can be just as painless considering everything has to go into a control system.
Most importantly, it is important to file regularly both receipts and incomings to avoid the end-of-month mess. While technology that automates our lives is often appealing, it can create complications for small-time freelancers. A good bank, a good invoicing system and a good monthly control document alongside regular logging can often be the most efficient method. Lastly, set up a master file ‘Finance’ and sub-files for every month. Each month should include: ‘Receipts’, ‘Invoices & Income’, ‘Bank Statements’, ‘Finanzamt Correspondence’, and ‘Control File’. Using the same system every month keeps everything clean and tidy for those times you have to look back.
This is important, because…
The last step is reporting to the Finanzamt, be it submitting your summary numbers to a Steuerberater or you choose self-submission and have learned the ELSTER-portal system. You will have agreed on your reporting frequency and method with the Finanzamt already, so it’s simply a case of staying on top of these deadlines. By putting in regular work and attention to managing your records, by the end of the month/quarter/year, this can be quite painless and you can set up your Excel sheet to do all the heavy math on your behalf.
If you use a handy tool like Kontist, you can also correlate the taxes set aside in your sub-account with your control document and be prepared to pay the amount the Finanzamt will request for payment without stress. You can read more about this and how Kontist can help you, here. Essentially, you should just have to triple check your incomings and outgoings against your bank statements and receipts, which should be filed chronologically. Save all of your summaries that were submitted, including the correspondence in return from the Finanzamt in the same corresponding folder as it comes available - and not only were you ready for reporting, you are ready to look back if need be!
But, we should delve a little more into some of these categories:
Costs for business dinner are only limited deductible. This means that you can only deduct 70% of these costs. Nevertheless, you receive back 100% of the paid VAT. This is also only for dinner with potential or current clients.
Example: The invoice amount is 119,00 € and includes 19 % VAT (19 €). Deductible amount: 70% is deductible i.e. 83,30 €. VAT: You will receive back 100% of the VAT i.e. 19 €. Please note that you always have to write down the name of the participants and the reason for the dinner on the receipt. Your signature is also required. When the invoice amount is exceeding 250,00 € gross, the invoice also needs to include your contact details (address).
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Travel costs are only deductible when they are business related - no, really. It is also a lot of work to document and subsequently claim so you should be very committed to good tax practices and ensuring everything is consistently in order. Assuming you need to travel for work, here are examples of travel costs:
- Train tickets
- Flight tickets
- Hotels or
- 0,30 €/km for trips with your own car (when it is not included in your business).
For business trips exceeding 8 hours, a lump sum for additional meal costs can be deducted. This lump sum depends on the duration of the trip as well as on the country to which you travel. For business trips outside of Germany, the lump sum is higher than for business trips within Germany.
Working From Home
Almost each self-employed person needs a room to perform his activity or to execute administrative activities which are related to the self-employment.
Requirement to deduct costs for home office:
Costs for home office are only deductible when it is a separate room and when it is exclusively used as home office. When you only have a working space e.g. in your living room, you cannot deduct any costs.
Which costs for a home office are deductible?
Costs like rent, water, insurances can be partially deducted (size of the home office in proportion to the total size of the flat). Divisible costs are:
- Depreciation or rent
- Interest payments for a credit
- Repair costs
- Costs for electricity, water, heating
- Waste collection
- Property tax
Costs which exclusively come up for the home office e.g. renovation of home office, are fully deductible. Costs for furnishing the home office are also deductible. Costs for furnishing e.g. desk, chair, shelf (exclusively used for business purposes) are also deductible expenses although you cannot deduct the costs for the room itself.
Can I deduct costs for my home office?
Case 1: You have a workplace at your client’s company for unlimited use, for each of your working days and for all of your activities which are related to your business. In this case, you cannot deduct any costs for a home office (part of the rent).
Case 2: You have a workplace at your client’s company, for limited use, for certain working days and for certain activities. For the remaining working days, you do not have a workplace at your client’s company so that you use your home office for performing your job. In this case, you can deduct costs up to an amount of 1.250 € per year.
Case 3: You do not have a workplace at your client’s company. You are performing your job exclusively in your home office. The actual costs for your home office can be deducted.
Phone and Internet
Telephone and internet costs are deductible. As in most cases, phone and internet are also used for private purposes the actual use for business purposes should be estimated to avoid possible difficulties in case of a tax audit. Yes, seriously. Or, work with two different connections.
The complicated stuff… Expensive acquisition costs vs. low-value assets (GWG)
Expenses that do not exceed 150 € net, can be deducted immediately in the year of purchase. The same applies for low-value assets (in Germany called GWG) not exceeding 410 € net. For purchases exceeding 410 € net other rules apply. The total purchase price cannot be deducted at once but over a certain depreciation period. Each economic asset has a different depreciation period. The Federal Ministry of Finance (“Bundesfinanzministerium”) has regulated those periods in a depreciation table (in German language “AfA Tabelle”). A car has a depreciation period of six years, a laptop has a depreciation period of 3 years etc. and this is followed quite strictly and adamantly. Though a tiny detail, it could prove problematic if it has been ignored in the reporting process or worse, exploited.
Special and Extraordinary Taxes
Health insurance and pension insurance contributions are deductible costs. These contributions are considered within your yearly income tax return. Further special and extraordinary expenses are for example not deductible:
- Church tax
- Donations within the EU
Keep it all in order…
Now there was also some information regarding cars and such deductibles - but we will just have to do a deeper dive into specialty tax deductions in the future. For now, a final note on keeping all of this in order… Records such as receipts, invoices and bank statements are required to be kept for 10 years. For many who have gone fully digital, many great accounting applications exist to track receipts in real time. However, there are many people who still use paper receipts as it can be easier to track certain expenses who do not realize they need a digital copy of the records as well. In the case of emergency or the aging of documents, the evidence of your activities may be lost. Ensure you have a cloud-based or backed up digital file, scan in your documents and ensure it correlates with your paper records. Using a cloud-based service also means you can provide easy access to external consultants, or be able to access your documentation from anywhere in the world.