Business Expenses: Definition, Rules and Tips

Before you start a business, you should take a thorough look at the subject of business expenses.

From a tax perspective in particular, a number of questions arise:

• Which costs can I claim as business expenses?
• How do I handle mixed business and private costs?
• Which depreciation rules must I observe?
• Which options are available for me to use?

This guide provides a clear introduction to the subject of business expenses. Bear in mind, however, that there are many special rules. As in tax law generally, some matters are complex. If in doubt, contact the experienced experts at Guhr Steuerberatung!

Business expenses are costs that arise from business activity. The opposite is expenditure for private living. Business expenditure is clearly connected with business activity.

As a taxpayer, you must be able to demonstrate this to the tax office if asked. In a cash-basis income statement (EUER), no detailed justification is required: as a rule, the tax authority will only make contact if an officer has well-founded doubts. In the context of a tax audit, you should expect a rigorous review of your business expenses.

Business expenditure need not be necessary, expedient, or customary. This guarantees you flexibility in respect of business expenses: you can claim a wide variety of expenditure for tax purposes without having to prove the business benefit.

Even expenditure that subsequently proves to have been pointless is recognised by the tax office as a business expense. This applies up to a certain point: if the expenditure exceeds the potential income in a conspicuous manner, the tax office may deny the tax deductibility.

Business expenses reduce the profit that serves as the basis for calculating tax. In concrete terms, this means: when you incur business expenditure, you reduce the tax liability. This applies to all relevant types of tax, including income tax, corporation tax, and trade tax. Profit is calculated as follows: business income minus business expenses.

Smaller business expenses and a variety of ongoing costs reduce your profit immediately and in full. The position is different for various purchases such as laptops and office furniture, where they exceed certain cost thresholds.

For purchases up to a net price of 800 euros, the legislature permits immediate write-off, although items with a value of 250 euros or more must be listed in a separate register. The tax effect of these low-value assets (geringwertige Wirtschaftsgüter) is fully realised in the year of acquisition.

For a purchase price of between 250 euros and 1,000 euros, you may alternatively opt for pooled depreciation, whereby the write-off is applied on a straight-line basis across five years in aggregate. For all other higher-value assets, you consult the AfA depreciation tables. The abbreviation stands for Absetzung für Abnutzung (depreciation for wear and tear). These tables set out the exact useful lives for all categories of asset: you spread the costs over the corresponding number of years when depreciating.

The list of possible business expenses is long: you can deduct a wide variety of business-related costs from your business income! What matters is that the business benefit is recognisable and predominant. The following chapter contains information on mixed-use expenditure that you may be able to claim in part as business expenses.

Typical examples of fully deductible business expenses:

• Rent and ancillary costs for business premises
• Professional and business insurance
• Wage payments to employees
• Purchase of office furniture and office equipment
• Purchase of office supplies and postage
• Telephone and internet costs
• Marketing and advertising expenditure
• Purchase of machinery and repair costs
• Purchase of a company vehicle
• Specialist books and trade journals

Not sure whether you may treat a particular cost item as a business expense? Contact your Guhr Steuerberatung!

Various expenditures touch on both business activity and private living. In some circumstances, you may be able to claim a portion of such expenditure as business expenses. This applies to costs where a relevant business-use element is present. The tax office also requires that the respective usage proportions can be easily and clearly apportioned.

Mixed-use costs include private cars used for business purposes, communication costs, various technical devices, and journeys that serve both business and private purposes simultaneously. Strictly separate private and business costs for these expenditures and document this in a clear and traceable manner! Alternatively, the tax office will accept estimates for certain expenditures, provided they satisfy objective criteria.

Working from home represents a special case. The first question here is whether the tax office recognises the home office as tax-deductible. It must bear a reasonable proportionality to the remainder of the dwelling, and you must use it for business purposes at least 90% of the time. If your home office meets these criteria, you may claim the rent and ancillary costs on a pro rata basis as business expenses. If you purchase furniture and other equipment for the home office, you may deduct these costs in full as business expenses. The same applies to repair and renovation costs.

For larger business expenses in particular, it is advisable to plan the expenditure with foresight. It may prove advantageous, for example, to bring forward certain expenses or to defer a transaction. This depends, among other factors, on the individual business situation and possible changes in tax law.

You should also consider any available alternatives, such as leasing rather than purchasing. The experienced team at Guhr Steuerberatung will provide you with many valuable tips on business expense management!

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