The most important answers on the subject of the 2023 tax return for small business owners

What taxes do small business owners pay?

Small business owners primarily pay income tax.

They are exempt from value-added tax (VAT), trade tax, and corporate tax as long as they stay below certain revenue thresholds.

How much tax do small business owners pay?

The basic tax-free allowance in 2023 is €10,908. For higher profits, a tax rate between 14 and 45 percent applies.

What should small business owners pay attention to in their 2023 tax returns?

Small and sole proprietors should ensure that all expenses such as advertising costs, travel expenses, and insurances are declared in the tax return.

Additionally, the submission of an income surplus calculation is required.

It is also important not to miss the submission deadline (September 2, 2024) to avoid additional costs.

The year 2023 marks a period of recovery for many entrepreneurs from the challenges of the past years, including the coronavirus pandemic and the energy crisis.

Efficient tax planning can help conserve financial resources.

The following taxes are paid by small business owners

Small business owners are primarily subject to income tax. As long as their annual turnover remains below €22,000, they are exempt from value-added tax (VAT).

This also applies to trade tax and corporate tax.

How much do small business owners need to pay in taxes?

The question that probably concerns you the most: How much tax are you likely to pay?

In principle, income tax is levied on profit. In 2023, profits up to €10,908 are tax-free.

This is known as the basic tax allowance.

For every euro above this amount, a tax rate between 14 and 45 percent applies.

How much you ultimately have to pay depends on your profit.

Additionally, it's crucial how many tax prepayments you have made throughout the year.

The tax office usually makes a suggestion for this based on your profit from the previous year or your estimate for the first year as a small business owner.

This is what small business owners need to pay attention to when filing their 2023 tax return

For the tax return of small business owners, three main pillars are important:

1. Consideration of all expenses in profit determination
2. Submission of an income-surplus calculation
3. Compliance with the tax return deadline

Deduct expenses from tax

Firstly, everything you want to deduct from taxes must be in a recognizable connection with your self-employed activity.

In practice, this means that if you are a musician, for example, you can deduct the purchase of a guitar or a piano.

However, if you are a lawyer, this is not possible.

And: For everything you purchase, you should keep a receipt or an invoice.

What can small and sole proprietors deduct from their tax returns?

Education and training costs

If you take part in a training course that is directly related to your self-employment, you can deduct it.

This can be particularly useful at the beginning of your self-employment in order to quickly deepen your specialist knowledge.

Travel costs

If you use your car more than 90% for yourself-employment, your car is considered work equipment.

That means: You can claim costs such as insurance, petrol, or interest as business expenses.

Insurance policies

You can fully deduct insurance policies that cover business risks. These include:

• purely corporate legal expenses insurance
• operational trade indemnity insurance
• operational fire, theft, and hail insurance
• statutory accident insurance
• business interruption insurance or loss-of-use insurance
• comprehensive, liability, and accident insurance for cars used for business purposes
• occupational accident insurance
• public liability, professional liability, and pecuniary damage liability insurance
• household contents insurance (pro rata) insofar as you have a home office 

Special expenses and pension expenses

You can deduct the following insurances on pro-rata basis:

• health insurance
• daily sickness allowance insurance
• life insurance
• long-term care insurance
• accident insurance
• term life insurance
• personal liability insurance
•  pension insurance‍

Advertising costs

Advertising costs include working materials and contributions to professional associations.

In addition, small business owners can deduct all other expenses they need for their self-employment as advertising costs in their tax return.

These include office equipment, business accounts, company cars, promotional gifts, and work clothes.

However, the tax office does not recognize the purchase of a business suit – these are too versatile.

Workplace

Small businesses and sole proprietorships that rent an office or a space in a co-working space and/or buy office furniture can deduct it from their tax return.

You can also claim your workplace at home if you have a home office.

Tax consultancy and legal fees

If you use a tax advisor or incur legal costs for a consultation or a lawsuit, you can deduct these in your tax return.

What Documents Do I Need to Keep for My Tax Returns in Germany?

As a business owner in Germany, keeping proper records and documents is crucial to preparing accurate tax returns and complying with legal requirements.

Here's a list of the most important documents you need to keep:

1. Invoices

Sales invoices: Keep all invoices issued for your sales or services.

These should include your VAT number, date, recipient details, and a breakdown of the VAT.

Purchase invoices: Keep all incoming invoices for goods and services you've purchased.

2. Receipts

Receipts for business expenses: These include all expenses incurred in running your business, such as office supplies, travel expenses and utilities.

Cash transaction receipts: If you have made any cash payments, these receipts are essential to support your expense claims.

3. Bank statements

Business account statements: Keep all bank statements for your business accounts to track income, expenses and any other transactions.

Credit card statements: If you use a credit card for business purposes, keep these statements as well.

4. Contracts and agreements

Customer contracts: Keep contracts with customers, especially those that detail payment terms and services provided.

Lease Agreements: Keep copies of all property and equipment leases.

Employment contracts: If you employ staff, keep copies of their contracts.

5. Tax documents

Previous tax returns: Keep copies of previous tax returns for reference.

VAT returns: Retain all documents relating to VAT returns, including returns and supporting documents.

Income tax returns: Retain all correspondence and documentation relating to income tax returns.

6. Payroll records

Employee Payroll: Maintain records of salaries, wages, and any taxes withheld.

Social Security Contributions: Maintain records of social security and pension contributions for employees.

7. Travel and Vehicle Records

Mileage logs: If you use a vehicle for business purposes, keep a detailed mileage log.

Travel Expenses: Keep receipts and records for business travel, including lodging and meals.

8. Asset documentation

Fixed Asset Register: Maintain a record of all fixed assets, including purchase invoices, depreciation schedules, and sale or disposal documentation.

Depreciation records: Keep records of how you have calculated the depreciation of assets.

9. Insurance documentation

Business insurance policies: Keep copies of all insurance policies, including liability, property, and employee health insurance.

10. Correspondence with tax authorities

Tax office correspondence: Retain all letters, emails and notices received from the tax authorities.

11. Additional business records

Inventory records: If applicable, keep a detailed record of your inventory, including stock levels and valuations.

Loan agreements: If your business has taken out loans, keep all relevant documentation.

Retention period

In Germany, the general rule is that most business documents must be kept for 10 years.

This includes all invoices, bank statements, and contracts.

For certain documents, such as payroll records, the retention period may be shorter (usually 6 years), but it's safer to keep them for 10 years unless your accountant advises otherwise.

Keeping organized and thorough records will help ensure that your tax returns are accurate and that you are prepared in the event of an audit.

Submitting a statement of revenues and expenditures

With the income-surplus calculation, small and sole proprietors calculate in their tax return how much profit they made in the year 2023.

For this, you write down your business income and business expenses. The difference yields the profit that your company has generated.

Example: Suppose you received €15,000 and spent €3,000 for your business. Then you have made a profit of €12,000.

The tax office bases your income tax on the profit you calculated. And: This is how it is determined whether you are still considered a small business owner.

When do you have to file your tax return?

Normally, the income tax return must be submitted by July 31 of the following year.

However, due to the Corona crisis, the Federal Government has postponed the deadline for the 2023 tax return slightly.

Therefore, the declaration must be submitted by September 2, 2024, at the latest.

If companies work on their tax return with a tax advisor or a wage tax assistance association, the submission deadline is extended to June 2, 2025.

If you miss the deadline for submitting the income tax return, you will face a penalty - usually after a prior reminder from the tax office.

The amount of the late submission surcharge is legally regulated.

The surcharge is 0.25 percent of the tax liability, but at least €25 for each month started of the delay.

Tip: If you already foresee that you will not be able to meet the deadline, apply for an extension.

Justify this and propose a new deadline.

The tax office accepts reasons such as prolonged illness, missing documents, or a move.

Where to send the tax return?

Typically, companies must submit their tax returns electronically to the tax office. For this purpose, they can use the "Elster" portal provided by the tax office, for example.

By the way, the tax return is not just a time-consuming matter but often also saves companies money is shown by figures from the Federal Statistical Office.

For example, 88% of the tax returns for the year 2018 resulted in a tax refund. On average, there was a refund of €1,072.

Will you still be a small business owner in 2024?

To remain a small business owner, you must not have made more than €22,000 in turnover (not profit) in the previous year and not expect more than €50,000 in turnover for the current year.

If one of these conditions is no longer met, you must calculate value-added tax (VAT) for your services.

How can your small business become tax-free?

Becoming completely tax-free as a small business in Germany is generally not feasible due to the country's comprehensive tax system. 

However, there are several strategies and legal provisions that small businesses can use to significantly reduce their tax burden. 

The main methods and considerations are outlined below:

1. Small Business Regime

What it is: A special VAT scheme for small businesses.

Eligibility:

• Annual turnover (including VAT) does not exceed €22,000 in the previous calendar year.
• Projected turnover for the current year does not exceed €50,000.
• Benefits:
• Exemption from VAT on invoices.
• Simplified VAT reporting requirements.
• Considerations:
• You cannot reclaim input VAT on purchases.
• Opting out means that you cannot opt back in at a later date without meeting the criteria again.

2. Trade tax exemption

What it is: An exemption from business tax for certain types of business.

Eligibility:

Sole traders and partnerships can benefit.

The first €24,500 of business income is exempt from business tax.

Benefits:

• Reduces the overall tax burden for small businesses.
• Considerations:
• Corporations (e.g. GmbH) are not eligible for this exemption.
• Trade tax rates vary between municipalities, which may affect the overall savings.
• Important considerations
  3. Non-profit status

What it is: Legal status for organizations serving public, charitable, or social purposes.

Eligibility:

Must meet specific criteria set by the German tax authorities.

Activities must be in line with recognized charitable purposes (e.g., education, charity, scientific research).

Benefits:

• Exemption from corporation tax and trade tax.
• VAT exemptions for certain activities.
• Eligibility to receive tax-deductible donations.
• Considerations:
• Strict compliance with non-profit regulations is required.
• Profits must be reinvested in the charity's mission.
  

Compliance: Always ensure that any tax reduction strategies comply with local tax laws to avoid penalties or legal issues.

Documentation: Maintain thorough and accurate records of all business transactions, expenses and relevant documents.

Consultation: Tax laws are complex and subject to change. It is highly recommended that you consult with a qualified tax advisor to tailor strategies to your specific situation.

Settle back taxes with a loan from Puls

Especially at the beginning of your self-employment, it is difficult to plan how much money you will earn in a year - and how high your tax prepayments will be.

If you underestimate, you may end up facing a significant taxback payment. If you cannot pay this, high penalties will be due.

To avoid this, you can take out a loan through Puls on a short-term basis and with little effort.

Puls takes into account your income and expenses when calculating your current credit limit.

You can then apply for the loan directly through the platform - without a credit check, without a bank, and with minimal paperwork.

This way, you can fully concentrate on developing your business.

How to Track Your Tax Payments With Puls Project?

Puls Project is a robust Fintech solution that helps small businesses successfully manage their cash flow and all the associated processes.

As such, our tool revolves around 3 cornerstones that are essential to kickstart your business journey:

1. Loan Capabilities
2. Mullti-banking Possibilities
3. Cash flow Management

Our loan feature enables you to get extra funding and reduce your cash burn rate, cover liquidity gaps, or use the extra cash for investments and expansion.

All it takes is 3 steps and you can get up to $100,000  for 12 months within at least 48 hours.

Key features:

• Tailor the credit to your business needs and select the desired amount and period
• Connect multiple bank accounts from over 4000 German banks and increase your loan amount
• View and manage all accounts and companies from a single dashboard for easier management
• Label and assign multiple categories to track your expenses and other financial transactions in a more organized way
• Manage invoice payments efficiently and maintain a clear history of payments in a single view
• Automate expense tracking and input your monthly costs only once — You’ll automatically see them the next month
• Get notified about any detected cash gaps so you can take proactive measures
• Track balances and spending across different accounts and companies
  

And so much more.

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