Claiming Pre-Opening Business Expenses for Tax Purposes

Business expenses incurred before the business opens must be directly and clearly connected with the intended business activity. These expenditures serve to generate income from the date the business opens.

The key point is that you can claim these expenses for tax purposes regardless of when you formally register your self-employment. Freelancers, for example, need not yet have submitted the tax registration questionnaire to the tax office. The tax-reducing effect even applies when the business does not open until the following year.

An example to illustrate this:

A freelancer begins trading in 2022 and has already incurred business expenses in the previous year. No self-employed activity existed in 2021. They may nevertheless submit Schedule EÜR (cash-basis income statement / EUER) and Schedule S (income from self-employment).

The pre-opening business expenses will then result in a loss, in the absence of any business income, which the tax office will formally determine. If the founder receives other income in that year, such as employment income, the overall tax liability is reduced. Alternatively, the loss may be carried forward.

A wide variety of business expenses may be incurred during the preparatory phase of starting up. They relate either to the planning and organisation of the start-up or to the concrete commencement of business activity. The first category includes, among other things, consultancy costs and legal and notarial fees. Travel costs to relevant start-up or trade fairs and investor meetings may also be claimed for tax purposes.

The second category comprises all business expenses that will also be required for your business after it opens.

These include costs for the following purposes:

• Marketing
• Office furnishings
• Rental payments
• Leasing agreements for vehicles and the like
• Communications (telephone, internet, etc.)
• Office supplies and postage
• Financing costs
• Procurement of goods

With pre-opening business expenses, tax offices apply stricter standards than for ordinary business expenses. After the business opens, you may, for example, claim all furnishings and equipment as business expenses provided they are intended for your business premises or home office.

For pre-opening business expenses, however, you must provide a clear explanation of why you need these items for your future business activity.

As a business owner, you are entitled to deduct input tax provided you are not operating under the Kleinunternehmer scheme. Prior to opening, however, you must still pay VAT on products and services, as you do not yet have the required tax number. Without this detail, you cannot exempt suppliers from charging VAT.

You are merely advancing this tax, however — in your next tax return you can reclaim from the tax office the VAT paid on pre-opening business expenses.

Various questions and problems may arise in connection with business expenses in the preparatory phase: does a particular invoice amount fall within the definition? Should I defer certain expenditure?

How do I document the connection between the cost item and the business activity? Guhr Steuerberatung will provide you with many valuable tips and give you active support with your tax return.

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