Change of Profit Determination Method: Overview of EÜR and Accounting

Anyone operating a commercial enterprise, working as a freelancer, or earning income from agriculture and forestry is required to determine their profit and pay income tax on it. German tax law essentially recognizes two methods for this: accounting (comparison of business assets) and the income surplus calculation, abbreviated as EÜR, also known as the 4/3 calculation according to § 4 para. 3 EStG.

Both methods ultimately lead to the same overall result in the long term – the so-called total profit. However, in individual financial years, the result can differ significantly, which can have noticeable tax consequences. When a change between the profit determination methods is mandatory, when it is voluntarily worthwhile, and what needs to be considered, we explain in this article.

Who must use accounting – and who may use the EÜR?

In principle, all companies that are merchants within the meaning of the German Commercial Code (HGB) are required to use accounting. This includes sole traders registered in the commercial register (e. K.), partnerships such as OHG, KG, and GmbH & Co. KG, as well as corporations such as GmbH, UG (limited liability), and AG.

Registered sole traders are exempt from the obligation to use accounting if they do not exceed 800,000 euros in sales revenue (for financial years before 2024: 600,000 euros) and 80,000 euros in annual surplus (for financial years before 2024: 60,000 euros) at the balance sheet dates. Both limits must be simultaneously undershot.

The EÜR is available to all those traders who are not required to use double-entry bookkeeping – particularly non-merchants and sole traders below the mentioned limits. Freelancers such as doctors, lawyers, architects, and tax advisors are generally not merchants within the meaning of the HGB and therefore do not have to use accounting – regardless of the amount of their sales or profits.

Change from EÜR to Accounting

When is the change mandatory?

As a trader, you will be required by the tax office to use accounting as soon as your sales (minus certain tax-free sales, such as from renting and leasing) exceed 800,000 euros in the calendar year or your profit from business operations exceeds 80,000 euros in the financial year. These limits apply to financial years starting January 1, 2024.

Important: The transition to accounting does not occur automatically by law. It only takes effect when the tax office explicitly requests it – and then only in the following financial year. If no request is made despite exceeding the limit, you do not need to act independently.

The tax office also always requires the preparation of a closing balance sheet when a company is sold or transformed – for example, when a sole proprietorship is incorporated into a GmbH. In the case of gratuitous transfers, such as gifts to children or spouses, such a requirement is inadmissible according to the constant case law of the Federal Fiscal Court (BFH), as the book values must be continued and no capital gain arises.

Why can a voluntary change be worthwhile?

A voluntary change to accounting is generally binding for three calendar years. Arbitrary switching back and forth between profit determination methods is not permissible under tax law. Nevertheless, the change can be sensible in certain situations.

Firstly, accounting creates clear conditions – especially in companies where a separate capital account should be maintained for each partner to clearly allocate withdrawal rights.

Secondly, accounting enables better risk management. As an accountant, you are required to create provisions when a claim is imminent. This not only creates transparency but also generates tax-effective expenses without any cash outflow – which can relieve liquidity.

Thirdly, the period-appropriate profit determination through accruals ensures an appropriate allocation of income and expenses to the respective financial years. The date of the actual cash flow becomes secondary.

Fourthly, banks generally prefer accountants when making credit decisions, as the asset and risk situation is presented much more clearly than in a simple EÜR.

What needs to be done during the transition?

Once the change to accounting is decided, two steps are necessary. First, an opening balance sheet must be prepared: All assets – fixed and current assets, receivables, and liabilities – must be recorded in terms of nature and amount. It must also be checked whether partial write-downs are necessary. If the tax balance differs from the commercial balance, a reconciliation is required.

Subsequently, a physical inventory of all assets must be conducted on the opening balance sheet date, i.e., the first day of the new financial year – particularly the inventory.

The Transition Result: Why a Reconciliation is Indispensable

When switching between the two profit determination methods, a transition result arises – either a transition profit or a transition loss. Without a correct reconciliation, there is a risk of double or completely missing recording of business transactions.

This can be well illustrated using the example of inventory: As an EÜR calculator, an entrepreneur has always booked their merchandise purchase as an expense upon payment. During the inventory for the opening balance sheet, they find an inventory worth 50,000 euros. Of this, 30,000 euros have already been paid, while 20,000 euros are still liabilities from deliveries and services.

Without reconciliation, the already booked expense of 30,000 euros would later be recorded again as cost of goods sold – an impermissible double recording. The reconciliation corrects this by adding the inventory (50,000 euros) and subtracting the existing liabilities (20,000 euros). This results in a transition profit of 30,000 euros, which reverses the already booked expense mathematically.

The principle behind the reconciliation is always: How has a business transaction affected the EÜR so far, and how would it be represented in accounting? If there is a risk of double or missing recording, it must be corrected.

It should be noted that in the area of depreciable fixed assets, there is generally no need for correction. Acquisition and production costs are recorded in both systems through depreciation (AfA) reducing profit.

Distribution of the Transition Profit over Three Years

To avoid tax hardships, a transition profit can be distributed over up to three years upon request. Through skillful distribution, progression can be reduced and the tax burden optimized. A transition loss, however, must be recognized in the first year – distribution is not possible here.

For the temporal allocation of the transition result, the following applies: If a company transfer occurs on December 31, the result belongs to the assessment period of that year. If the transfer occurs on January 2 of the following year, it shifts accordingly – a leeway that can be used for tax purposes.

Change from Accounting to EÜR

Who is allowed to switch?

A switch to the EÜR is only possible if the entrepreneur is neither required to use accounting under the HGB nor due to an order from the tax office. Both conditions must be simultaneously met.

Why can the switch be worthwhile?

The main advantage of the EÜR lies in its significantly lower administrative effort. While accounting requires complex period-appropriate profit allocation, the EÜR essentially only represents actual cash flows. Debtor or creditor booking of business transactions is not necessary.

Furthermore, the EÜR offers more flexibility in tax planning. By strategically controlling the timing of payments, the tax result of a financial year can be legally influenced. Individual expenses can be shifted to the following year, and the timing of issuing outgoing invoices can be chosen so that payment receipts occur only in the next year.

An example: According to VAT law, an invoice must be issued within six months after the service is provided. If an EÜR calculator has already achieved a high profit in one year, they can issue invoices for services from July only in December. The payment receipts then occur only in the following year – the tax burden is legally deferred to the future and may be reduced by the progression advantage.

What needs to be done during the transition?

First, a closing balance sheet must be prepared on the date of the switch. This forms the basis for the subsequent reconciliation.

Since there is also a risk of double or missing recording with this switch, a reconciliation with "reversed signs" must be carried out based on the closing balance sheet. Important correction items are:

Provisions have already reduced the profit in the past without actual cash flow. Since an EÜR calculator is not allowed to create provisions, existing provisions must be added to the profit when switching.

Active accruals must be subtracted, as the cash outflow has already occurred. Without correction, this expense would be lost.

Passive accruals must be added, as the corresponding income has not yet been fully recorded.

The result of the reconciliation counts towards the current profit and is also subject to trade tax in the case of commercial activity.

Even as an EÜR calculator, the obligation to maintain a fixed asset register remains. Depreciation is deducted just as in accounting – the actual payment date of the acquisition costs does not matter.

Scheme for Determining the Transition Result

The following overview shows the typical correction items in the reconciliation. The scheme is not exhaustive. Always check in individual cases whether a business transaction would be double-counted or not considered at all, and correct accordingly.

When switching from EÜR to accounting starting from the prepared opening balance sheet, the following amounts must be added: inventory, receivables from deliveries and services, other open receivables, prepayments made, and active accruals. To be subtracted are: prepayments received, liabilities from deliveries and services, other liabilities, provisions, and passive accruals.

When switching from accounting to EÜR the signs are reversed. To be added are: prepayments received, liabilities from deliveries and services, other liabilities, provisions, and passive accruals. To be subtracted are: final inventory, receivables from deliveries and services, other open receivables, prepayments made, and active accruals.

Conclusion

The change of profit determination method is not merely a formal act – it can have significant tax implications and simultaneously offers opportunities for structuring that should be wisely utilized. A carefully prepared reconciliation is the central tool to ensure correct and complete recording of all business transactions.

Whether a change is mandatory or voluntarily considered: Seek tax advice early to avoid missing deadlines, optimally distribute transition profits, and choose the best profit determination method for your situation.

This article serves general information purposes and does not replace individual tax advice. The mentioned thresholds apply to financial years starting January 1, 2024 (§ 141 AO). For financial years before 2024, different thresholds apply (600,000 euros turnover / 60,000 euros profit).