Deduction of operating expenses

Definition and legal basis:

The deduction of business expenses is a fundamental principle of tax law that enables entrepreneurs and self-employed persons to claim tax relief for costs incurred in connection with their business activities. The legal basis can be found in the Income Tax Act (EStG), in particular in Section 4 (4) EStG. According to this, business expenses are “expenses that are caused by the business”. This principle applies to income tax as well as to corporation tax and trade tax.

The deduction of operating expenses is based on the net principle of taxation, according to which only the actual profit, i.e. the difference between operating income and operating expenses, should be subject to taxation. This is intended to ensure fair and performance-based taxation.

Prerequisites and delimitation:

The following requirements must be met for recognition as a business expense:

1. business justification: the expenditure must have a material connection with the business activity.
2. actual outflow: the expenditure must actually have been incurred.
3. verifiability: the entrepreneur must be able to substantiate the expenditure, usually by means of invoices or other suitable evidence.

Differentiation from other types of expenses:
– Private expenses: Purely private costs are not deductible.
– Mixed expenses: In the case of partly business and partly private use, an apportionment is required.
– Acquisition and production costs: These are generally to be taken into account via depreciation.

Types of operating expenses:

There are a variety of expenses that can be recognized as business expenses, including

1. personnel costs (wages, salaries, social security contributions)
2. rents and leases for business premises
3. Advertising and marketing costs
4. Vehicle costs
5. Office supplies and equipment
6. Training costs
7. Travel expenses
8. Insurance
9. Interest on operating loans
10. Depreciation of fixed assets

Special features and restrictions:

Tax law provides for various restrictions and special regulations for the deduction of business expenses:

1. prohibition of deductions (§ 4 para. 5 EStG): Certain expenses are not or only partially deductible despite being business-related, e.g.:
– Expenses for gifts over 35 euros
– 30% of hospitality costs
– Fines and penalties

2. restrictions on the deductibility of vehicle costs:
– For private use, an apportionment is required (e.g. 1% method or logbook method)

3. interest barrier (Section 4h EStG):
– Limits the interest deduction in the case of high debt financing

4. documentation requirements:
– Increased requirements for proof of certain expenses (e.g. travel expenses, entertainment expenses)

Practical significance and design options:

The deduction of business expenses is of great practical importance for companies of all sizes:

– Direct impact on the tax burden and thus on the company’s liquidity
– Important factor in corporate planning and investment decisions
– Opportunity for tax optimization through targeted expenditure planning

Design options:
1. Timing of expenses to control the annual result
2. Choice between immediate deduction and depreciation for low-value assets
3. Optimization of vehicle use (purchase vs. leasing, choice of accounting method)
4. Use of special depreciation allowances and investment deductions

Current developments and discussions:

The deduction of business expenses is regularly the subject of legal and political debate:

1. digitalization: new challenges in the delimitation and verification of operating expenses in the digital economy

2. home office: discussions about the tax treatment of working from home, especially in the context of the COVID-19 pandemic.

3. sustainability: Consideration of tax incentives for environmentally friendly investments through extended deduction options.

4. international aspects: Increasing importance of transfer pricing issues in cross-border transactions.

5. simplification: efforts to simplify the complex regulations, especially for small and medium-sized enterprises.

In summary, the business expense deduction is a central element of corporate taxation that reflects the economic reality of companies and enables fair taxation. Correct handling requires a deep understanding of the tax regulations and careful documentation. At the same time, the deduction of business expenses offers opportunities for tax optimization and is an important factor in business decisions. Future developments will be significantly influenced by technological advances, economic changes and political decisions.