Glossary Cash Basis Taxation

Cash accounting (Istversteuerung) (also: taxation according to amounts actually received) is a method of VAT taxation under German law in which VAT only arises when the consideration is actually received. The legal basis includes, among other provisions, Section 20 of the German VAT Act (UStG): entrepreneurs may calculate tax on the basis of amounts received if turnover in the previous calendar year did not exceed a specified threshold. Cash accounting affects the timing of output VAT and input VAT and has direct effects on liquidity and bookkeeping.

Definition and legal basis

Cash accounting provides that VAT for a supply of goods or services only arises when the consideration is actually received by the supplying business. By contrast, accrual accounting (Sollversteuerung) produces tax liability already on performance of the supply or on invoice issuance.

Important: The option to use cash accounting is subject to conditions (statutory turnover threshold). If the threshold is exceeded, accrual accounting generally must be applied. Details are governed by the German VAT Act (UStG), in particular Section 20 UStG.

Practical effects in bookkeeping

For day-to-day bookkeeping, cash accounting mainly shifts the timing when VAT must be reported and paid. This affects the VAT advance return, liquidity planning and the input VAT deduction.

VAT advance return

VAT must be declared in the VAT advance return for the period in which the payment was received. Filing frequencies for advance returns (monthly/quarterly) remain in place regardless of the taxation method and are governed by the general thresholds and rules.

Input VAT deduction

Entrepreneurs using cash accounting can generally claim the input VAT deduction only at the time they pay their supplier. That is: if you pay a supplier invoice later, you can only claim the input VAT at that later point in time. This particularly affects liquidity in the case of investments.

Advantages and disadvantages with practical examples

The decision to use cash accounting depends strongly on the individual business model. Below are practical advantages and disadvantages and examples:

• Advantages:
  • Improved liquidity when customers pay late: you only remit VAT once cash has been received.
  • Lower risk of having to pay VAT on receivables that later prove uncollectible.
• Disadvantages:
  • Input VAT deduction only upon payment: tax relief from input VAT may be delayed for large investments.
  • Increased administrative effort for year-end carryovers and reconciliations (open items across the year-end).

Example 1 – Advantage (liquidity): You issue an invoice on 20.12.2025 for net EUR 1,000 plus 19% VAT (EUR 190). The customer pays only on 15.01.2026. Under cash accounting the VAT only arises in January 2026; payment of the EUR 190 to the tax office therefore occurs later than under accrual accounting.

Example 2 – Disadvantage (investment): You purchase a machine in December but only pay in January. Under cash accounting you can claim the input VAT only in January; under accrual accounting the input VAT could possibly be claimed already in December.

Implementation in practice and concrete journal entries

For practical bookkeeping observe the following steps:

1. Check whether you meet the requirements to use cash accounting (note: turnover threshold in the previous year).
2. Inform the tax office if necessary that you wish to apply cash accounting or indicate the setting in your VAT advance return/Elster filing.
3. Configure your accounting software for cash-based VAT posting (due-date-based VAT posting).
4. Perform regular reconciliations of open items at year-end to correctly reflect carryovers into the next period.

Typical journal entries (simplified presentation):

• When payment is received (customer pays invoice of net EUR 1,000 + EUR 190 VAT = EUR 1,190):
  • Bank to Revenue EUR 1,000
  • Bank to Output VAT EUR 190
• When you pay a supplier invoice (invoice net EUR 1,000 + EUR 190 input VAT):
  • Input VAT to Bank EUR 190
  • Expense/Advertising expenses to Bank EUR 1,000

Conclusion: For many freelancers and small businesses, cash accounting can be a sensible option to improve liquidity and reduce risks from bad debts. Check the requirements under Section 20 UStG and discuss the decision with your tax advisor to correctly manage effects on input VAT, investments and VAT advance returns.