Profit in commercial and tax law terms refers to the excess of income over expenses of a business within a defined period. For freelancers and small businesses, profit is the central metric for assessing the economic situation, the basis for tax assessment, and the foundation for withdrawals and investments.
Legal foundations and different concepts of profit
The concept of profit varies depending on the legal area and the form of the business. Under the German Commercial Code (HGB), the annual surplus is derived from the balance sheet and the profit and loss account. For tax purposes, profit is determined according to the provisions of the German Income Tax Act (EStG) or, for corporations, the Corporate Income Tax Act (KStG). Small businesses and freelancers can often use the cash-basis surplus calculation (Einnahmenüberschussrechnung, EÜR) pursuant to section 4 (3) of the German Income Tax Act (EStG) instead of preparing a balance sheet.
Key terms:
- Balance sheet profit: Result under HGB, taking into account reserves and non-distributable items.
- Annual surplus/deficit: Result of the profit and loss account.
- Profit after tax: Result after deduction of income tax, trade tax or corporation tax and solidarity surcharge.
Profit determination in practice
For practical bookkeeping the distinction between the cash-basis surplus calculation and balance-sheet accounting is decisive:
Einnahmenüberschussrechnung (EÜR)
In the EÜR, business income and business expenses are matched in the year in which they affect cash. This method is simpler to apply for many freelancers and sole proprietors up to certain turnover or profit thresholds.
Example EÜR:
| Item | Amount (EUR) |
|---|---|
| Business income | 60.000 |
| Business expenses | 40.000 |
| Profit | 20.000 |
Balance-sheet accounting
For entities required to prepare financial statements (under the HGB), revenues and expenses are recorded on an accrual basis. Depreciation, provisions and prepaid/accrued items affect commercial and tax profit and can lead to differences between the commercial and tax balance sheet.
Tax implications and special items
The calculated profit forms the basis for income tax or corporate tax and trade tax. Important points:
- Trade tax: Based on trade earnings; there are allowances for sole proprietorships and partnerships.
- Depreciation: Fixed assets reduce taxable profit over their useful life.
- Provisions: They affect profit because they bring expenses forward, but are only tax-deductible under certain conditions.
- Owner withdrawals: For sole proprietors and partnerships, private withdrawals are not recorded as expenses; they do not directly reduce profit but reduce equity.
Concrete example: You are planning an investment in office furniture. In the EÜR low-value assets (GWG) can be expensed immediately; otherwise depreciation is applied over the useful life, which will affect profit in subsequent years.
Practical tips for freelancers and small businesses
A clear profit determination is the basis for liquidity and tax planning. Practical recommendations:
- Maintain timely document and account filing to clearly assign income and expenses.
- Use the EÜR if you are not required to keep balance-sheet accounts — it reduces effort and costs.
- Observe tax deadlines and prepayments; plan reserves for tax payments.
- Clarify commercial vs. tax accounting issues with a tax advisor if in doubt, especially for acquisitions, provisions and valuation options.
- Document private withdrawals and contributions so that business profit is not mixed with personal funds.
Conclusion: Profit is more than a number in the bookkeeping. It is the basis for decisions on taxes, distributions and investments. By correctly determining profit according to the EStG and HGB you create transparency, avoid tax surprises and strengthen the financial management of your business.