All About Profit Determination Methods in the Tax Advisory Firm

The selection of profit determination methods is an important aspect for all taxable companies and freelancers. The correct method for determining profit can have significant effects on the tax burden. This article explains the various profit determination methods and their advantages and disadvantages for taxpayers.

1. Overview of Profit Determination Methods

Income tax law offers various options for determining profit: accounting and surplus income statement (EÜR). Accounting is done through a comparison of business assets, while the EÜR is a simpler method where only business income and expenses are compared.

1.1 Who Must Determine Their Profit Through Accounting?

Entrepreneurs who are considered merchants under the Commercial Code (HGB) are required to account. This applies to sole proprietors as well as partnerships and corporations such as GmbHs and AGs. Newly established companies are subject to certain revenue and profit thresholds that allow exemption from the accounting obligation.

1.2 Who May Determine Their Profit Through EÜR?

Non-merchants and freelancers who are not required to keep double-entry bookkeeping can use the EÜR to determine their profit. Freelancers such as lawyers, doctors, and architects often resort to the EÜR as they are not required to account.

2. Switching from EÜR to Accounting

A switch from EÜR to accounting may be necessary under certain circumstances, such as when required by the tax office. However, there are also voluntary reasons for switching, such as clearer circumstances, better risk management, and satisfying lenders.

2.1 When Is a Switch Mandatory?

The tax office can require a business operator to account if certain revenue and profit sizes are exceeded. The mandatory transition to accounting only occurs at the request of the tax office and can lead to tax advantages regarding capital gains.

2.2 Why Can a Voluntary Switch Be Beneficial?

A voluntary switch to accounting can create clear circumstances, enable better risk management, provide clear delineations, and satisfy lenders. This step requires careful preparation and the creation of an opening balance sheet.

3. Switching from Accounting to EÜR

A switch from accounting to the simplified EÜR can offer advantages such as simplified administration and more flexibility. The transition requires the creation of a closing balance sheet and a reconciliation statement.

3.1 Who May Switch from Accounting to EÜR?

Taxpayers who are not required to account can switch from accounting to EÜR. The EÜR offers a simple method for determining profit, resulting in simplified administration.

3.2 Why Can a Switch Be Beneficial?

The EÜR is simpler compared to accounting and allows more flexibility in managing the taxable result. The transition requires the creation of a reconciliation statement to ensure the correct representation of business transactions.

Overall, choosing the right profit determination method is crucial for a company's tax situation. Both accounting and EÜR have their advantages and disadvantages, which should be carefully weighed to find the best solution for the respective situation.