Business expenses are expenses incurred through the business that reduce a company’s profit. Under German tax law they are the counterpart to business income and directly affect the tax burden when determining profit (balance sheet or cash-basis profit and loss statement). The main legal basis is the Income Tax Act (in particular the provisions on profit determination).
Principle and legal basis
As a general rule: only expenses that are clearly business-related can be claimed as business expenses. The legal basis is, in particular, the EStG (profit determination by offsetting business income and business expenses). Investments are not always immediately deductible as business expenses but may be spread over time through depreciation (AfA) pursuant to §7 EStG.
Also important in practice are the rules on value added tax (input VAT deduction under the UStG) and the retention obligations for tax-relevant documents under §147 AO. Proper documentation is a prerequisite for the tax authorities to recognize expenses.
Typical business expenses in practice
Freelancers and owners of small businesses regularly encounter the same types of expenses. Typical items are:
- Personnel costs: wages, salaries, social security contributions and fees to freelancers.
- Rent and premises costs: office rent, utilities and dedicated home office (only recognized if necessary for the business).
- Operating/material expenses: office supplies, professional literature, software licenses, postage and telecommunications.
- Travel expenses: travel costs, per diem allowances and overnight accommodation for business trips.
- Insurance and fees: business liability insurance, legal expenses insurance, professional association fees.
Entertainment, gifts and representation
Entertainment expenses for business partners are only deductible under certain conditions and are usually limited; the tax office also requires precise details on the occasion, participants and amount. Business gifts are generally deductible but are often subject to caps and documentation requirements.
Depreciation and low-value assets
Assets with a longer useful life are not recorded entirely as an immediate business expense but are allocated over time via depreciation (AfA). Smaller purchases can be immediately written off as low-value assets (GWG). Currently the GWG threshold is €800 net; such amounts are immediately deductible and simplify bookkeeping.
Mixed-use expenses and private element
There is often a private element (e.g. with vehicles used for mixed purposes, home office or business-used mobile phones). In such cases the business portion must be appropriately allocated and documented. A proper allocation prevents later reductions by the tax office.
Examples:
- Laptop: 80% business use → 80% of the acquisition cost or depreciation as a business expense.
- Company car: choosing between a logbook (actual use) and the 1% rule (flat-rate private portion) affects the tax treatment.
- Home office: if a separate workroom is present, room costs can be deducted proportionally; for mixed-use rooms a precise allocation is required.
Documentation, tax audit and common mistakes
Complete and verifiable receipts are essential for the tax authority to recognize business expenses. Every expense should be supported by an invoice or cash receipt; hospitality expenses additionally require a list of participants and a description of the occasion.
- Retention: Tax-relevant documents must be retained under §147 AO.
- Input VAT deduction: Input VAT on supplier invoices is only deductible where used for business purposes under the UStG.
- Common mistakes: missing receipts, insufficient allocation of mixed-use costs, incorrect immediate deduction of capital expenditures instead of depreciation, and incomplete entertainment documentation.
Practical tip: Keep clear accounts and receipt files from the start, document business reasons and consult a tax advisor if in doubt. Especially during audits, clear schedules and verifiable receipts are the key to having your business expenses recognized.