Glossary Business Expense Allowance

Flat-rate business expense allowance generally refers to a standardized deduction option for business expenses: instead of collecting evidence for every single expense, a flat amount or a percentage of the business income may be claimed as a business expense—provided that the respective tax law allows a flat-rate treatment for the specific case. For freelancers and small business owners this is a simplifying alternative to keeping individual receipts, but it is only applicable in the cases regulated by law.

Legal basis and distinction

The term itself is not a single, uniform tax concept but a collective term for various statutory flat-rate provisions in German tax law. Certain flat-rates are anchored in the Income Tax Act (EStG) or in sector-specific regulations; the Value Added Tax Act (UStG) contains other simplifications (e.g., the small business scheme) that do not, however, constitute a flat-rate business expense allowance in the narrow sense. It is important to distinguish this from other flat-rate amounts such as the employee standard deduction for work-related expenses (Werbungskostenpauschbetrag) or tax-free allowances (e.g., per diem meal allowances): the flat-rate business expense allowance concerns solely the deductibility of business expenses.

Practical application in bookkeeping

Whether and how a flat-rate business expense allowance is applied in bookkeeping depends on the specific statutory provision and the chosen profit determination method (cash-basis profit calculation (EÜR) vs. double-entry bookkeeping).

Recording in the cash-basis profit calculation (EÜR)

• If a flat-rate is provided for, record the income in full on the income side.
• The flat-rate is shown as an item under business expenses or as “other operating expenses” in the EÜR.
• Receipts for individual items generally do not need to be submitted, unless the provision requires a minimum level of documentation.

Example calculation

*The percentage is fictitious; actual percentages or lump sums depend on the legal regulation for the respective area.

Advantages and disadvantages and concrete use cases

For many small businesses and freelancers a flat-rate is attractive because it reduces the effort and cost of collecting receipts. At the same time, using a flat-rate carries risks if the allowance is lower than the expenses actually incurred.

• Advantages:
  • Simple handling in bookkeeping
  • Reduced documentation effort in tax audits (depending on the regulation)
  • More predictable tax burden
• Disadvantages:
  • No deduction for actual higher expenses
  • Possible restrictions regarding trade tax or social security reporting
  • Only provided by law in certain sectors/situations

Concrete cases: A part-time designer with modest material costs benefits if the flat-rate covers their actual expenses. A craft business with high machinery and subcontracting costs is usually better off with individual evidence.

Notes for tax returns and tax audits

Only apply a flat-rate business expense allowance if the specific tax provision expressly permits it. In the tax return the allowance is reported in the profit determination (EÜR or Annex G/F when using the income surplus calculation) or taken into account as the corresponding item in accounting.

• Documentation: Record why the flat-rate was applied (legal basis, period).
• Tax audit: Auditors will require proof that the flat-rate was applied in compliance with the rules; therefore keep the legal basis and, if necessary, calculation records available.
• Effects: Check impacts on trade tax, VAT advance returns and social security obligations.

Conclusion: The flat-rate business expense allowance is a useful simplification tool, but not a universal solution. Check the relevant statutory rules before applying it or consult a tax advisor to avoid tax disadvantages.