Changes in the investment deduction

In addition to various improvements to the investment deduction, two structuring models with the deduction amount are now excluded by law.

Investment deductions allow depreciation potential to be brought forward to a fiscal year prior to the acquisition or production of certain assets. In addition, special depreciation allowances are also possible for the acquisition or production of favored assets in order to bring forward further depreciation potential. A key element of the Annual Tax Act 2020 is a mini-reform of the investment deduction, which reduces various eligibility requirements and increases the deduction amount.

At the same time, two tax arrangements involving deductions have been ruled out by law, at least one of which has been popularly used to date to offset additional results following a tax audit. While the improvements already apply to fiscal years ending after December 31, 2019, and can thus already be claimed in the tax return for 2020, the two changes intended to legally exclude the unwanted tax arrangements will only take effect from 2021.

In addition, the Corona stimulus package last summer created a one-off special rule for the investment deduction. This is because claimed investment deductions must generally be used for investments within three years. Otherwise, they must be reversed and interest accrues on the resulting back taxes. For amounts deducted in 2017, however, many companies faced the problem that, as a result of the Corona crisis, the investment could not be realized in 2020 as planned. To avoid the resulting negative effects, the deadline for investment deductions, whose three-year investment period expires in 2020, was therefore extended by one year to four years. Entrepreneurs can therefore make up for the investment in 2021 without any negative tax consequences.

• Investment costs: The preferential investment costs are raised from 40 to 50 %. This also indirectly allows higher limits for immediate depreciation of low-value assets, because only the acquisition or production costs reduced by the investment deduction amount are to be used for the limit test. Previously, the deduction amount could be used to immediately write off assets up to a value of 1,333 euros and to include up to 1,666 euros in the collective item rule. By increasing the eligible investment costs to 50 %, from 2021 assets with a value up to twice the threshold amount can effectively be included in immediate or collective item depreciation. For this purpose, an investment deduction amounting to 50 % of the acquisition or production costs will be claimed in 2020, which can then be used to reduce the actual costs to be recognized by half for the acquisition or production in 2021.

• Operational use: Previously, only assets that were used exclusively or almost exclusively in the business in the year of investment and in the following year, i.e. at least 90 %, were eligible for tax relief. Due to the fact that the assets are used in the business, they are not only used for private purposes, but also used free of charge in another business of the entrepreneur. In order to make the possibilities of use for favored assets more flexible, leased assets are now also favored, regardless of the duration of the respective lease. In contrast to the previous regulation, longer-term rentals for more than three months are thus also harmless. This also applies if the entrepreneur leases the asset to another business of his own.

  

• Profit limit: Up to now, the individual types of income were subject to different company size criteria, which may not be exceeded for the investment deduction amount. In the case of companies preparing balance sheets, this is a maximum business asset value of 235,000 euros, in the case of agricultural and forestry businesses an economic value or substitute economic value of 125,000 euros, and in the case of businesses with income statement accounting, a maximum profit of 100,000 euros. Because the tax authorities are convinced that the previous size criteria are in part unsuitable for defining favored businesses, particularly in the area of agriculture and forestry, a uniform profit limit of 200,000 euros is to apply in the future for all types of income as a prerequisite for claiming investment deduction amounts. This significantly expands the group of beneficiaries, while some large companies will no longer be covered by the preferential regulation in the future.

• Subsequent assertion: It is possible to apply for an investment deduction amount retrospectively, provided that the corresponding tax assessment can still be changed, for example in the case of a proviso of subsequent audit. This possibility is often used after tax audits in order to compensate for additional results determined during the audit by subsequently claiming a deduction amount. Because this use is not in the interests of the tax authorities, from 2021 the use of deductions for investments that have already been acquired or manufactured at the time of the claim will be excluded. The amendment exclusively affects investment deduction amounts applied for retrospectively and claimed after the end of the objection period for the first tax assessment or separate determination. Deduction amounts claimed up to the end of the objection period for the first tax assessment may continue to be used for assets regardless of their date of investment.

• Partnerships: The German Federal Fiscal Court (Bundesfinanzhof) ruled that a tax-privileged investment also exists if the investment deduction has been deducted from the total net profit of a partnership and the planned investment is later made by a partner and capitalized in the partner's special business assets. As a result of this ruling, taxpayers who do not invest at all can also benefit from the relief. Therefore, as of 2021, it has been clarified that the addition of investment deductions is only permitted in the asset area in which the deduction was made. For example, if a deduction was claimed in the special business assets of a shareholder, the deduction can also only be used for investments made by this shareholder in his special business assets.