date | theme

August 4, 2021 | Startups and taxes: Secure advantages & avoid disadvantages

18. October 2021 | Employee participation at startups: Analysis of legal measures

17. May 2022 | Small Business Owners: Tax Specifics – Advantages – Disadvantages (this contribution)

29. January 2025 | New Small Business Regulation of § 19 UStG

Small business owners have special tax requirements. In the case of sales tax, the small business regulation of § 19 (1) sentence 1 UStG applies accordingly. Therefore, you hear again and again that it makes tax sense to be a small business owner. We get to the bottom of this question and explain the advantages and disadvantages of being a small business owner.

Small businesses are companies that do not reach certain sales thresholds. The small business regulation is particularly interesting for the part-time self-employed or professionals. Therefore, when setting up a company, the question arises as to whether one is considered a small businessman at all and whether it makes sense to apply the small business regulation to his company.

For small business owners, the special feature of § 19 (1) sentence 1 UStG applies to sales tax. This means that VAT is not levied. Consequently, the small business owner is effectively treated as a non-business owner. Conversely, however, the small business owner is not entitled to deduct input tax according to § 19 (1) sentence 4 UStG. Accordingly, he is not entitled to a separate VAT statement in his invoice. If he still knows the sales tax, he also owes the specified tax according to § 14 c paragraph 2 UStG. The small business regulation has the advantage for the financial administration that it can concentrate on the important business activities.

For an entrepreneur to be considered a small entrepreneur, however, he must meet certain requirements. An entrepreneur is to be classified as a small entrepreneur if the net turnover plus the tax calculated on it does not exceed certain turnover limits. Therefore, turnover does not mean profit. The profit due to the deduction of expenses is lower than the turnover and must therefore not be confused. On the one hand, no more than 22,000 euros may have been received in the previous calendar year. On the other hand, there must be a well-founded forecast that the revenue threshold of 50,000 euros is not expected to be exceeded in the current calendar year. However, the small business regulation is not linked to companies but to individuals. Therefore, for the turnover thresholds, all sales taxable income of all the companies of the person is added up.

In the year of the establishment of the company, the founder may estimate the annual turnover for the first year. Therefore, he may make use of the small business regulation if the annual turnover is expected to be no higher than 22,000 euros. Often a company does not start in January. Then the small business turnover limit is also reduced. If you start your activity in May, you will only be entrepreneurial for eight months out of the twelve months. Then the sales limit is only 22,000 euros/12 months x 8 months = 14,667 euros.

Therefore, the small business regulation is based on a forecast. Therefore, it may be that the turnover actually achieved is unexpectedly above the turnover limit. However, this does not in principle have any adverse consequences for the calendar year that has elapsed if they have taken into account all known tax bases at the time of the estimate. From January of the following year, however, you are automatically subject to standard taxation. This also applies if you had an annual turnover of less than 22,000 euros in the previous year, but expect more than 50,000 euros in the following year.

It is therefore particularly important for you to monitor whether you exceed sales thresholds. If you neglect this and do not show any sales tax in the invoice, although you actually should, from the point of view of the tax office, the invoice amount is a gross amount, which already includes the sales tax. The so determined sales tax you must then pay to the tax office.

But then the question arises whether you can also correct the invoices afterwards. If the invoice went to a consumer, a correction is no longer possible, because you are obliged to give the consumer gross prices. If, on the other hand, the bill went to an entrepreneur, you can correct the bill. They can then deduct input VAT, but this means additional administrative burdens for them.

In the invoice, the small business owner must point out that and why the turnover is not subject to sales tax. We therefore recommend the passage “According to § 19 UStG no sales tax is charged”. In addition, the invoice must contain the full name, the full address of the invoice recipient, the tax number or the VAT identification number, quantity and type of service, the delivery date or service date and the invoice date.

In the context of income tax, there is small business regulation. Therefore, small business owners owe income tax on all income. Even if all income does not exceed the basic allowance of 9,984 euros in 2022, small business owners do not owe any income tax. Influencers, for example, usually carry out their activities as sole proprietors, so that they then earn income from commercial operations within the meaning of § 15 (1) no. 1 EStG. However, if they operate their company in the legal form of a partnership, for example a company under civil law (GbR), income is available within the meaning of § 15 (1) no. 2 EStG. Capital companies, such as the company with limited liability (GmbH) or the entrepreneur company (UG), which are of course subject to their own founding requirements, are taxed according to the Corporate Tax Act. Their shareholders, on the other hand, then again earn income from capital assets.

The fact that the small business owner does not have to pay sales tax has administrative advantages for him. For companies, the sales tax regularly means a lot of work. On the one hand, the entrepreneur must determine the correct sales tax rate of 0%, 7% 0of 19% for his performance. On the other hand, he must correctly invoice the sales tax to the customer and comply with the regulations, since otherwise a business customer cannot deduct input tax. In addition, the entrepreneur must pay the invoiced sales tax to the tax office.

As part of the deduction, the trader must first calculate the deductible share of the input tax from all incoming invoices and determine how much he still has to pay to the tax office by deducting the deductible input tax from the sum of the sales tax receipts. He must then register the remaining amount once a month with the tax office by electronic VAT advance notification and also transfer it. At the beginning of the following year, he has then admitted an annual sales tax return and outstanding payments to make.

These administrative advantages of the small business regulation seem very tempting at first glance. For one, small business owners do not have to determine a tax rate and do not have to differentiate between the invoice amount and sales tax. On the other hand, they do not have to file VAT advance declarations and do not have to calculate the payment burden.

In addition, small business owners do not have to show sales tax on services sold and do not have to pay input tax on them. Thus, its products can be cheaper for consumers. However, the small business owner will also pass on the non-deductible input tax he had to pay in advance for business purchases to his customers. Then there is no price advantage in this respect. Even if he does not do this and at some point exceeds the sales threshold, he must show the sales tax in his invoice in the future, so that the prices increase and therefore customers may jump.

In addition, small business owners also have to submit the annual sales tax return, so that effort is incurred in this respect. However, it is usually sufficient to indicate the annual turnover, since it is then already clear that no sales tax has to be paid.

A disadvantage for the small business owner may result from the fact that he is not entitled to deduct input tax. If the small business owner pays another entrepreneur, it may be that the small business owner is ultimately charged with sales tax. Since he cannot deduct the input tax, he will include the sales tax in his prices. This makes their products more expensive. Other entrepreneurs, on the other hand, do not have to factor the sales tax into their prices, but can deduct the input tax. For this reason, small business owners have the option to opt for standard taxation in accordance with Section 19(2) of the UStG.

Since small business owners cannot deduct input tax, liquidity disadvantages arise especially in the start-up phase with high initial investments. Other entrepreneurs, on the other hand, can deduct the input tax accordingly.

Sales tax is intended to burden the end user and not the entrepreneurs. Therefore, traders are entitled to deduction. Even with regular taxation, there is therefore no tax burden for companies. Consequently, small business owners have no tax advantage when it comes to sales tax. This would also not be justified under constitutional law, since the sales-related promotion effect is not very effective, since it increases especially with the volume of sales. In addition, a breach of the principle of equal consumption burdens would be reprimanded. Rather, the small business regulation alone justifies simplifications and relieves the small business owner of disproportionate tax cooperation obligations and declaration obligations.

In summary, it can be seen that the small business regulation has various disadvantages. If you want your company to earn more than 22,000 euros at some point, we generally advise against small business success, because you can not deduct input tax for the initial investments when starting the company. Something else can apply if they work part-time commercially in the private customer business and do without large investments.