Tax Aspects Of Starting a Business

Which revenues are relevant for the tax department?

Revenues from self-employment are referred to as “operating revenues”. The most common operating revenues of artists and musicians are

  • Fees
  • Expenses
  • Grants from collecting societies
  • Proceeds from the sale  of operational assets
  • Prize money won at competitions (only prizes awarded for the artist’s oeuvre are tax-free)
  • Collected VAT

Which expenses are tax deductible?

The tax department generally accepts all costs incurred by self-employment as operating expenses. It is important to keep supporting documents such as purchase contracts, receipts and the like. The following may be considered job-related expenses could be:

  • Mailing costs, office supplies, photographic material, copies, etc.
  • Office costs. If you work from home, you can deduct eligible home office expenses against your self-employment income (rent, electricity and additional costs can be claimed in proportion to the base area if your working space is almost exclusively used for business purposes)
  • Communication costs (telephone / internet)
  • Bank account management fees (operating account)
  • Books, magazines, newspapers used for professional purposes
  • Contributions to professional associations (e.g. interest group representatives, trade unions)
  • Car costs (it is recommendable to keep a logbook)
  • Travel expenses ( train tickets, taxi fares, accommodation and catering)
  • Hospitality costs (business lunches, etc.)
  • Consultancy fees of (business consultant, tax consultant, etc.)

Other costs may include special expenses (some insurance installments, provident expenses, home ownership expenses, church tax, expenses for vocational training, etc.) and depreciations.

Value added tax

Once you have an income from self-employment work, you need to know whether you are liable to value added tax (VAT).

As a freelancer, you must charge the appropriate rate of VAT on your services.  The standard rate is 19%, the reduced rate is 7%.
If in doubt, you can get information about the tax rate that applies in your case from a tax consultant.

The reduced tax rate of 7% applies for works that are protected by copyright, among others.

VAT-exemption for small businesses in Germany

To be a small entrepreneur, you have to fulfill two important criteria: your turnover generated last year should not exceed €17.500 and your turnover expected for the current year should not exceed €50.000

You may choose to pay VAT voluntarily nevertheless.

Even when registered as small entrepreneur, you may decide to pay VAT anyways.  Paying VAT also means that you can get VAT back from all your work-related purchases. Once you have decided to pay VAT, you are obliged to pay for 5 years.

 As a freelancer, you have to report and declare the VAT you collected on a monthly basis.

Source: Hubatscheck, Bernd: "Existenzgründung", http://www.mkk-consult.de, retrieved December 2018.