Earlier (see article“Can you tell me differences between US and German tax law?”) we covered some general differences between US and German tax law. In this article we would like to highlight the differences between the sec. 179 deduction – a popular deduction for freelancers under US tax law – and the German counterparts.
The American sec. 179 deduction is an immediate expense deduction that business owners can take for purchases of depreciable business equipment instead of capitalizing and depreciating the asset over time. This is extremely helpful in that taking the cost of the equipment as an immediate expense allows you to get a substantial tax break right away whereas capitalization and depreciation of an asset only allow for smaller deductions over longer periods of time. This makes the sec. 179 deduction a tax incentive for business owners to grow their businesses with the purchase of new equipment.
The sec. 179 deduction is limited to such items as cars, office equipment, business machinery, and computers – essentially movable business assets. These assets must be used for business purposes more than 50% of the time to qualify for the deduction. Also, the purchase price must be within the dollar ranges allowable by the code – for tax years beginning in 2023, the maximum deduction is $1,160,000. Also, there are limits to the total amount of the equipment purchased – for 2023 it is $2,890,000. Finally, you must place the property in service during the tax year for which the deduction is being claimed. Equipment covered by the sec. 179 deduction might also qualify for bonus depreciation, which would further reduce your tax bill. However, we will cover this bonus depreciation in a separate article!
On the German end there are two types of depreciation to provide similar tax breaks. The first type of depreciation is for low-value movable assets. However, this means that you can only expense these assets if their value does not exceed the equivalent of roughly $900. If they do you need to depreciate them either over their regular lifetime or you can utilize a “pool-depreciation” which has a standard depreciation period of five years. That is, if the value of the asset does not exceed roughly $1,000.
The second type of depreciation is an upfront “investment deduction”. If your business makes less than €2,200,000 in profit during the year in which you take the deduction you can take 50% of anticipated expenses as an immediate deduction. However, the total deduction cannot exceed €200,000 over a period of 3 years and expenses need to pertain to qualifying assets – essentially also movable business assets. However, you have a period of three years during which the qualifying asset needs to be purchased, it does not need to be in the year in which you take the deduction. The assets purchased under this regime can also be subject to German bonus depreciation. Again, we will cover bonus depreciations under US and German tax law in a separate article.
Overall, we think it is obvious that the American sec. 179 deduction is the more powerful tool when it comes to providing tax breaks as investment incentive. While the German rules provide more flexibility when it comes to putting equipment in place, they cannot provide the same tax incentives the US sec. 179 does.
Last, the above highlights why the taxperts cannot just take the business results from a schedule C for face value to work with it on the German side. When sec. 179 deductions come into play, it is very well possible that a loss on the American side becomes a profit on the German end.
Please reach out to us if you have question in the proper application and alignment of US and German special tax deductions.
