Tax issues such as the tax return for sole proprietorships play an important role when starting a company. The legal form as a sole proprietorship is in great demand and popular because it is sometimes the simplest form for you as a trader from a tax point of view. You will find out in detail what is important to you when it comes to the subject of sole proprietorship tax returns and what you have to consider if you continue reading this article.
Sole proprietorship – who is sole proprietorship?
If you want to become self-employed and want to start a company, then in your planning phase you are faced with the question of which legal form to choose for your company. The different legal forms in Germany are regulated in different laws and you have to make the following distinction:
- one-man business
- Corporations such as the GmbH or the AG
- Partnerships such as the civil law, short and just GbR called
As a sole proprietorship you count if you are a self-employed person and run a business or work as a freelancer. These activities are carried out by you alone. If you are a sole trader, you also need a trade license. You must apply for this at the trade office responsible for you when setting up your sole proprietorship.
Liability as a sole proprietor:
Compared to other legal forms, there are also differences as a sole proprietorship when it comes to liability. If you cause damage while doing your job or if you run into financial difficulties with your sole proprietorship, then you have to be liable with your private assets. In contrast to a GmbH, there is no limitation of liability for a sole proprietorship.
Determination of profits by the EÜR
As a sole proprietorship, you can do what is known as an income surplus calculation. This is abbreviated simply as EÜR. However, this only applies if you have not recorded more than 600,000 euros in sales or not more than 60,000 euros in profit. With your tax return for sole proprietorships, you submit this income-surplus invoice as an EÜR attachment. If you have a turnover or a profit that is above these amounts, you are required to keep accounts. For you, this means that in this case you have to draw up a balance sheet. An exception here is the freelancer. There is no limit for freelancersand you can always create an EÜR. The small business owner is another exception.
Small business regulation for sole proprietorships
Even as a small business owner, you can submit an EÜR to the tax office with your income tax return. However, this only applies if you make use of the small business regulation and the tax office classifies it as a small business according to § 19 UStG. For this small business regulation, however, you must also observe certain limits. An increased sales limit has been in effect since January 1st, 2020. According to this limit, your annual turnover must not exceed 22,000 euros. Before the increase, this limit was 17,500 euros. If you are below this limit, you do not need to submit the EÜR when submitting your income tax return, you can do so informally do.
Taxation of sole proprietorships
As a sole proprietorship, you have to pay certain taxes. These are incurred for you regardless of the amount of profit and sales. You have to pay these taxes in any case:
- Income tax and possibly church tax
- Business tax
- value added tax
However, the basis for your taxation is always your bookkeeping. This means that you have to record everything that you earn or spend in the course of your work. It does not matter whether it is a commercial or a freelance activity. For the amount of your taxes, it is important that you determine your profit, because this represents your assessment base. With the payment of the taxes listed above, you must also be clear that in addition to the income tax return, you also have to submit a sales tax return as a sole proprietorship.
Income tax return for sole proprietorships
When setting up a partnership or starting a sole proprietorship, the tax burden is determined using the income tax return. To do this, however, in the first step you have to understand how to determine the income in the first place, which you then actually have to tax. All your income from your activities, including those from non-self-employed activities, will be included in your income tax return. In addition, there is possible income from rentals or your income from your self-employment or from your commercial activity. You have to pay attention to the following points:
- For your income tax return for sole proprietorships, you have to use the annex to the income-surplus-account ( annex EÜR ) to record your income from self-employment or the income from a commercial enterprise. You can use all templates directly via the ELSTER portal, which the tax office provides you with free of charge. Tip: Calculate the items in the EÜR facility in Elster in advance using our free EÜR template for Excel.
- If you have less than 22,000 euros in sales per year, you do not need to fill out the annex for the income-surplus-account, you can enclose this informally with your income tax return. This is often the case if, for example, you are only self-employed as a part-time job.
- When recording your income, you must note that the so-called monetary benefits also belong to the income. This is the case, for example, if, as an entrepreneur, you also use your company car for private use.
Your tax liability for income tax begins when you reach the so-called subsistence level. You also have a certain tax allowance per year. If you are single, this tax exemption is 9,744 euros and for spouses who are assessed together or for registered partners, 19,488 euros. Everything about this allowances is n is, for income tax purposes for taxation used.
Tax return for sales tax
Like any other entrepreneur, as a sole proprietor you are obliged to submit a VAT return. In the course of the year, you also have to submit a sales tax return to the tax office every month. The sales tax for sole proprietorships is only not mandatory if you are subject to the small business regulation. In this case, the sales tax included is always offset against the input tax and paid to the tax office. The purpose of the annual sales tax return is to check that sales tax has been properly paid. This review can lead to you either making an additional payment to pay or whether you will get a refund from the tax office.
However, you don’t always have to make a monthly advance VAT return. This only applies if you have sales tax of more than 7,500 euros per year. In this case, the payment to the tax office must always be made by the 10th working day of the following month at the latest. However, if you only have a maximum sales tax of up to 7,500 euros per year, then a quarterly sales tax return is sufficient.
Tax return for business tax
Every registered business is subject to trade tax in Germany. However, this tax is always levied by the municipality in which you and your company are based. For this reason, the trade tax is not uniform. If you run a sole proprietorship as a freelancer, you are exempt from paying trade tax. This means that in this case you do not have to submit a trade tax return. However, when it comes to business tax, you have to pay attention to a few points.
- With a sole proprietorship or a partnership, you are only obliged to pay trade tax if your annual business profit exceeds an allowance of EUR 24,500. The trade tax to be paid is only determined in the event that the profit is higher. In the event that you have to pay trade tax, you can offset this in the income tax return for sole proprietorships and thus reduce your income tax.
- A corporation such as AG, GmbH or UG does not enjoy an allowance in the tax return for trade tax.
Tax calculation by tax rate
The trade tax is calculated using a so-called municipal tax rate. Every city and municipality is entitled to determine its own business tax rate by means of its own statute. You should know that this rate increases with the attractiveness of the community. Specifically, the more attractive the municipality, the higher the assessment rate. For example, the tranquil community of Dierfeld in Rhineland-Palatinate currently has a rate of assessment of 900 percent and is thus far ahead in the ranking of the most expensive communities and cities. To be able to calculate the amount of your business tax, you need four sizes.
- Your projected business profit
- Your allowance, which is usually 24,500 euros
- Your tax index, which is 3.5 percent for the whole country
- Your business tax multiplier, which is valid by your municipality
Tax return deadlines for sole proprietorships
If you submit your income tax return as a sole proprietorship, you have to observe deadlines for filing the tax return. In this case, the deadline set is always July 31 of the following year. This means that if you want to submit your tax return for 2020, your deadline ends on July 31, 2021.
However, if you have income tax for sole proprietorships done by an income tax aid association or your tax advisor, you have a longer deadline. In our example, the deadline would be December 31, 2021. However, you do not have to apply for a separate extension of the deadline for this extended period. If you submit a tax return yourself, you can extend the deadline to apply for. If there are plausible reasons for this and the tax office approves an extension of the deadline, the income tax return for sole proprietorships must be submitted by September 30th at the latest. But you have to make sure that you submit this application before July 31st. Do not you do that, it can happen that you have a penalty, even failure supplement must pay. If the deadline falls on a Sunday or public holiday, the reference date is always the next working day.
Deduction with the tax return – but what?
As a sole proprietorship, you can’t avoid paying taxes. But honestly. Who likes to pay too much of it and doesn’t want to save where they can? Therefore, when filing your income tax return for sole proprietorships, you should also pay attention to the possibilities of what you can deduct from the tax. What exactly can you claim for tax purposes?
- Deduction of travel expenses and travel expenses. This is also possible for the small business owner.
- Deduction of entertainment expenses. However, you always have to make sure that these are plausible and that their amount is reasonable.
- Selling gifts for business partners or employees.
- In no case should you forget the so-called investment deduction amount. This amount is especially important for you in the years when your business teller has been ringing really well. With the investment deduction you can ensure that your business assets are taxed lower. This amount applies primarily to movable business assets that you use as an investment. Goods that are used for resale or patents, etc. are excluded from the investment deduction, for example. It is important that an object to be purchased is used for business purposes at least at a rate of 90 percent in the future. Otherwise you cannot claim the investment deduction.
Here again for you at a glance and easily manageable what you can sell:
- ride costs
- Traveling expenses
- Hospitality costs
- Costs for gifts to business partners or your employees
- Investment deduction
Reduce the tax burden & use tax advantages
You definitely have some tax advantages with a small business. You should definitely keep this status until you are asked to change this status by the tax office. In plain language, this means that you run a small business if you are self-employed but do not have to enter your business in the commercial register. The HGB, the commercial code, has a clear definition for small businesses. A small business is when ” the type and scope of the company does not require a commercially organized business“.
Another way to reduce your tax burden is by reducing your business assets and increasing your business expenses. This is easier than you think. Simply buy any number of items under a value of 150 euros for your company. But everything together must not cost more than 410 euros. You can then deduct this amount from your tax without starting a so-called depreciation. Items of such a purchase are also referred to in technical terms as GWG or minor economic goods.
There is no question that you have to file an income tax return as a sole proprietorship. However, there are a few things here that are not that easy to calculate. In addition to the income tax return, you usually also have to submit a trade tax return and a sales tax return. But as a sole proprietorship you have a few options to minimize your tax burden. This is especially true if you run a small business. It is important that you observe deadlines when filing your income tax return for sole proprietorships.