Which expenses can be claimed against tax? Learn how you can optimise your PV investment in terms of tax.
The company with which your PV system is operated is subject to tax obligations, and with clever management, you can gain tax advantages. The areas in which this is possible are illustrated in the following explanations. They are written from the perspective of an investment made in Germany, in 2021. Other laws may apply for other (tax) periods.
Check plausibility in advance
Please check the plausibility before each investment: Do the expected electricity revenues cover the expected costs? The result should be a positive amount, something which is not always the case. Some economic calculations are nicely conflated, for example, with the revenue from speculative asset sales in the far future, thirty- and forty-year electricity production with speculative electricity profits, or with tax relief but with the tax burdens forgotten
When can expenses be claimed for tax purposes?
Depending on the project phase, different issues arise in terms of tax. In the project preparation, you can already claim:
Turnover tax: You only make sales from the time you start feeding electricity into the grid. However, turnover tax amounts can be invoiced for the planned operation refunded by the tax office as so-called input tax. This applies from the first preparatory act, which must be proven by objective characteristics. This includes, for example, the conclusion of an advisory contract for the acquisition of a photovoltaic system or trips to inspect systems.
Investment deduction: With the investment deduction amount (Investitionsabzugsbetrag, IAB) according to § 7g EStG, the German income tax law, depreciation can be brought forward. For example, in the case of an initial investment in 2021, the IAB is claimed in the year (or up to three years before) prior to the investment, in 2020, as part of the associated type of income of a commercial enterprise. The IAB cannot be claimed in the same year as the acquisition is made. However, it is potentially possible to claim the IAB retroactively for 2020.
Trade tax: Business expenses can only be claimed from the beginning of the advertised business activity, meaning when all requirements for the provision of services by the company have been fulfilled. As a result, you must own the photovoltaic system for this and start feeding electricity into the grid.
You can however have the trade tax credited against your income tax. The trade tax assessment amount to be applied for this purpose has been increased from 3.8-fold to 4.0-fold as of 2020. In simplified terms: the trade tax is now fully credited up to a collection rate of 400%; for collections rates above 400%, the tradesperson pays on top. Find out which collection rate applies at the asset location.
Depreciation and investment deduction
The investment deduction according to §7g EStG is particularly interesting for tax optimisation. It makes it possible to bring depreciation potential forward to a financial year prior to the acquisition or production of favoured assets. With the help of the deductions leading to a tax deferral, funds are saved that can facilitate the financing of planned investments. The IAB allows for a modified deduction of 50% (instead of the former 40%) of a maximum investment volume of €500,000, meaning a tax deduction of €200,000.
The amendments apply initially to investment deductions and special depreciation claimed in financial years ending after 31 December 2019.
In addition, according to Section 7g (5) EStG, special depreciation (from acquisition) can also be claimed for the acquisition or production of favoured assets in order to bring forward greater depreciation potential.
For all types of income, a uniform profit limit of €200,000 of the business applies as a prerequisite for claiming investment deductions.
IAB and loss carryback: The IAB can also be used for tax loss carryback (linked to §110 EStG). The additional payment (on which interest must be paid) should not be forgotten. If you speculate on inflation and are successful, and if you manage to invest the back tax in an inflation-proof way, you could even make tax-free earnings.
IAB for partnerships: An amendment to Section 7g (7) EStG is intended to clarify for partnerships that the addition of investment deductions is only permissible in the asset management sector in which the deduction was made. This ensures that the tax relief is only granted to those actually making investments. If, for example, an investment deduction was claimed in the special business assets of a co-entrepreneur of a partnership, the deduction can also only be used for investments from this co-entrepreneur in their special business assets. In the case of tax audits, it is no longer possible to make investment deductions for assets that have already been acquired.
2..5-fold write-down due to the Covid-19 crisis
In the wake of the Covid-19 crisis, the German federal government has increased depreciation rates. Movable assets (including existing systems!) acquired from 2021 on can be claimed for tax purposes in 2021 at 2.5 times the straight-line depreciation rate. For (new) PV systems, this means 12.5% instead of 5%. Additionally, regular special depreciation of 20% can be claimed in accordance with §7g (5).
This article was written with the support of Alexander M. Hill, tax consultant and partner, Ratzke Hill Partnerschaftsgesellschaft mbB and Klaus G. Finck, counsellor-at-law and tax consultant, FASP Finck Sigl & Partner Rechtsanwälte Steuerberater mbB.
To read the original article in German, click here.
This article was published in our investment guide. For all other articles and information on Direct investment in commercial-sized photovoltaic systems, please visit: Milk the Sun – PV Investment Guide.