The grand coalition stimulus package also includes an increase in the crediting of business tax to income tax. This is a tax offsetting procedure intended to achieve a balanced taxation of sole proprietors and shareholders of partnerships in the context of income tax. Until now, the trade tax has been applied to income tax in the amount of 3.8 times the trade tax measurement amount. In the course of relieving the German economy in coping with the consequences of the Corona pandemic, this amount is now to increase to 4.0 times the trade tax measured amount. Using a selected example, we calculate the crediting of business tax to income tax. But first we also explain the background underlying this credit method.

In the video we explain to you the innovations resulting from the Corona economic package in the business tax crediting to income tax.

1. Background on the crediting of business tax to income tax

1.1. Avoiding excessive taxation of entrepreneurs

It is hard to believe nowadays, but there were times when the trade tax was deductible as a business expense. Since then, the trade tax has changed steadily.

This also applies to the total tax burden of entrepreneurs, and thus also to income tax. This is because the tax burden on commercial entrepreneurs with both business tax and income tax may lead to the fact that the entire tax burden of an entrepreneur takes up more than 50 % of the profit. Therefore, from a constitutional point of view, the argument that this case comes quite close to expropriation is understandable.

On the other hand, trade tax is the main source of income for cities and municipalities. An abolition of the trade tax without an adequate substitute was therefore politically excluded. For this reason, the legislature has included the crediting of trade tax to income tax to a certain extent in the Income Tax Act as a solution to this situation (§ 35 EStG). Of course, this has an impact on the federal government’s tax revenue, but all other alternatives discussed to remedy this circumstance have so far been disregarded for a variety of reasons.

1.2. Crediting business tax to income tax is a tax reduction

Another note on the crediting of business tax to income tax: The consideration of the business tax paid by the entrepreneur takes place as a tax reduction. This means that business tax is basically treated like an advance tax payment. Although it can only be counted up to a certain amount, this amount then completely reduces the income tax of the entrepreneur. It therefore does not indirectly affect the taxable profit of the taxable person. Therefore, it offers the advantage that a direct tax deduction takes place.

1.3. Crediting of business tax: the first increase since 2008

Although trade tax is still seen as in need of reform, in its present form it appears fair, at least in one respect. From the point of view of sole proprietors and shareholders of partnerships, the crediting of business tax to income tax is a regulation that largely compensates for a double tax burden on the entrepreneur with both taxes. Until 01.01.2008, the crediting was allowed to be at most 1.8 times the trade tax measurement amount. From 2008 onwards, the eligible maximum amount increased to 3,8 times the trade tax measurement amount. And now the maximum amount is to be increased again, whereby it should be up to 4.0 times the trade tax measured amount on the income tax.

The governing coalition has proposed increasing the crediting of business tax to income tax under the stimulus package to help entrepreneurs cope with the consequences of the Corona pandemic. In particular, this should contribute to improving their liquidity. After all, many companies need a lot of support precisely in this respect, because the lack of orders in a very large number of companies has resulted in a decrease in their liquidity. This measure is therefore intended to strengthen the competitiveness of entrepreneurs.

To demonstrate the process by which business tax is credited to income tax, we proceed in two steps. First, we calculate the trade tax of a business company as an example, before we then explain what effect this has on the income tax of the entrepreneur.

In our example, the business should be a sole proprietorship. We attribute an annual profit of EUR 121,500 to the company.

3.1. Calculation of business tax

When calculating the business tax of sole proprietorships and partnerships, an allowance of EUR 24,500 is applied to the profit. Therefore, the remaining return of EUR 97,000 is relevant in the further course of the calculation. It is now multiplied by the control number of 3.5%. The product of this is then the tax measurement amount, which the tax office determines and reports to the respective municipality entitled to collect the trade tax. Thus, the tax measurement amount is EUR 3,395.

At this point, the lifting gear is applied to the control measurement amount. However, since cities and municipalities can freely determine the lifting rates themselves, provided this is at least 200%, we must now either take a real example or set a fictitious lifting rate. Because this calculation example claims to be representative, we choose a lifting set that reflects the German average. That is why we are assuming a 450% rate.

The business tax is thus calculated as follows: