In tax law, it is important to know and apply the terms exactly. This also includes the distinction between allowance and exemption limit. Because this difference can already be recognized in the law by a small detail. From a tax point of view, these benefits are of course very relevant and tax-saving in the application. For example, there are various allowances to be used when selling a company or selling a GmbH shareholding. In addition, a review of the use of allowances is often useful in inheritance or gift tax transactions. In the following, the terms are first defined and some examples are shown.

The significant difference between exemption limits and exemption amounts is explained below. In addition, terms such as lump sums and maximum amounts are used. Because in many laws of tax law and also in administrative instructions, there is always talk of this. Since these regulations have extremely different economic effects, everyone should know the differences. Some exemption limits and exemption amounts are also explained below.

First of all, it is necessary to consider the concept of exemption. This means an amount up to which no taxation occurs as a legal consequence. This applies regardless of the area of law, be it the inheritance and gift tax law or the income tax law. However, if the amount is exceeded, the entire share is subject to taxation. Emphasis should be placed on the ‘if’ feature, which in principle characterises an application of the exemption limit.

To illustrate the term, the following example is given:

Now, for example, the exemption for the real estate transfer tax is 2,500 euros, whereby the acquisition of a property is exempt from taxation according to § 3 no. 1 GrEStG, if the value determining the tax (§ 8 GrEStG) does not exceed 2,500 euros. In two exemplary cases, when transferring a property to a partnership in accordance with § 8 GrEStG, the relevant value is once a 2,000 euros and in another case b 3,500 euros. It is now questionable to what extent the different situations are to be taxed according to the real estate transfer tax.

Now the relevant value in a is below the legal exemption limit. Thus, in this case, the transaction is exempt from the real estate transfer tax and there is no tax payment. In case b), the relevant value is above the exemption limit of 2,500 euros and therefore it is to tax it. Since the exemption limit was exceeded, the full amount of the 3,500 euros is taxable, without this being reduced.

Real estate transfer tax is often incurred when converting companies. Nevertheless, there are also ways, such as the transfer of land between partnerships, whereby the real estate transfer tax can be avoided.

Now an allowance is clearly distinguishable from an allowance limit, because the allowance is even usable if it is exceeded. This therefore represents a significant difference from the exemption limit. This leads to the conclusion that the tax allowance must always be deducted when determining the taxable amount. Thus, there is talk of a factual tax exemption. In addition, there is also a characteristic word for the allowance, which suggests the application in the law. If the term “so far” is used, the application of an allowance usually applies.

To illustrate the term, a simple example is chosen:

Namely, the basic allowance according to § 32a EStG in 2021 is exactly 9.744 euros when determining the tariff income tax. If the taxable income is less than this amount, i.e. an income of, for example, 8,000 euros, there is no income tax. Thus, the allowance corresponds first of all to the application of the allowance. However, it will be exciting if this amount is exceeded, for example with an income of 14,000 euros. Because now only the 4,256 euros (14,000 euros -9,744 euros) are subject to tariff income tax.

Furthermore, there are terms such as lump sums and maximum amounts in the context of tax law. Here, the lump sums are used without the obligation of proof by the claimant. The idea of the legislator is that up to this contribution usually expenses have arisen. However, if higher costs have arisen, these must be proven by evidence. Instead of the lump sum, it is always possible to specify higher amounts, provided that a corresponding basis (e.g. documents) is available. For this reason, even in the case of advertising costs for employees, an overrun of the flat-rate amount of 1,000 euros may only be deductible by providing corresponding documents. It should always be noted that either the lump sum or the actually incurred costs can be claimed.

In part, there is also a limitation of amounts, as is the case for pension expenses, for example. Tax deductible maximum amounts are set here. Thus, the maximum pension amount in 2021 is 25,787 euros. In addition, only 92% of it may be tax deducted, which reduces the amount to 23.724 euros again. Any expenses that exceed this amount are therefore not tax deductible.

The exemption threshold plays an important role, for example, in private sale transactions pursuant to § 23 EStG. Here, capital gains up to an amount of 1,000 euros are tax-free.

For gifts for business partners or customers, the strict rules must be adhered to. Accordingly, not more than 35 euros per financial year and per person may be tax deducted as operating expenses. Because if the amount is exceeded, the entire amount is not deductible.

In the context of international corporate structures, loan agreements are often concluded and thus interest expenses are transferred. The interest rate threshold is considered to be the limitation for the deduction of this interest expense. Here, the 3 million euro exemption limit for interest is known and must be observed.

If you have questions about allowances and tax arrangements in the context of inheritance tax and gift tax law, we already explain in the video above the different groups for the allowances and the different effects of the tax classes. In the context of inheritances and donations, the relationship is first of all important. The most important allowances are those for spouses and children. For married couples, an allowance of 500,000 euros applies and for children an allowance of 400,000 euros for inheritances or gifts.

For example, if a taxpayer has only one business, but has not yet reached the age of 55, it is advisable to wait with the sale of the business. Not only because of the allowance according to § 16 Abs. 4 EStG, which would be denied, but in particular also because of the advantage arising from § 34 para. 3 EStG results.

Expert advice on the use of

Inheritance allowances?

This applies to natural persons in accordance with § 17 para. 3 EStG an allowance of 9,060 euros for the sale of shares in corporations. For example, this also applies to an arising profit on sale of a GmbH.

Furthermore, there are in the trade tax law according to § 11 para. 1 S. 3 No. 1 GewStG an allowance in the amount of 24,500 euros in the determination of trade tax. It is always important to reduce the business income by this allowance.

In the context of the determination of business income, the amount of the additions according to § 8 No. 1 GewStG is to be reduced by an allowance of 100,000 euros. However, this allowance was even increased to an amount of 200,000 euros in the course of the second Corona Tax Assistance Act.