Entitled to deduct input tax are all those companies that invoice sales tax themselves and pass it on to the responsible tax office. In return, they are all allowed to deduct the input tax, which is equivalent to a counter-calculation with the forwarded sales tax. There is therefore no input tax deduction for small businesses and freelancers who do not charge sales tax themselves.
What does entitled to input tax deductible mean?
A company that itself lists sales tax (usually 19 percent) on the invoice in addition to the net amount and thus collects this from customers, forwards the total amount of sales tax to the tax office. However, the same company also pays invoices that were issued to the company with 19% tax. From the company’s point of view, this amount is input tax , which is now deductible.
In principle, it is a counter-calculation of the sales tax levied and paid.
What do sales tax, sales tax and input tax mean?
While most in the B2B area of VAT is spoken, it is consumers and consumers on the other hand as a value added tax known. The tax rate is usually 19 percent or, alternatively, 7 percent.
According to WHICHEVERHEALTH.COM, the consequence is that the net amount, the tax and the gross amount must be shown separately on each invoice. Through this tax, the state is involved in every entrepreneurial business and it is always clear what net amount actually goes to the company providing the business.
The pilot means that a company receives an invoice, are shown on the well net amount, tax amount and total amount. The company pays the full amount. The tax amount included can be returned from the tax office with the present invoice, which makes this item a purely transitory item. That is why companies only compare net prices and calculate in this form. Specifically, the offsetting takes place in the advance VAT return, which we will go into with an example below.
When and under what conditions are input tax deductible?
You can only deduct input tax yourself if you invoice sales tax yourself and pass it on to the tax office. Anyone who is exempt from sales tax , i.e. typically runs a small business, cannot claim input tax deduction . Here, with the reference to the small business regulation, the total amount is invoiced, but no sales tax is charged. Therefore, the next step, so to speak, the offset in the form of the input tax deduction, is not possible.
Who is not entitled to input tax deduction?
Only companies that collect sales tax themselves can deduct input tax. This means that the above-mentioned companies that are exempt from sales tax (small business regulation) are not entitled to input tax deduction and of course private individuals are not entitled to deduct input tax either. End consumers and small businesses can therefore not deduct input tax, with one exception:
A small business owner who falls under the small business regulation and does not have to levy sales tax can waive being covered by this regulation. He then makes use of all the rights and obligations that companies without small business regulations have – including the obligation to show sales tax on the invoice and, conversely, the possibility of claiming input tax deduction.
Requirements for the input tax deduction
It must be taken into account that not only the company itself has to meet certain requirements in order to be able to deduct the input tax. Rather, the invoice must also be issued absolutely correctly so that the input tax can be deducted.
It is important that all mandatory components of the invoice are specified.
Another special feature is that some services are completely exempt from sales tax, such as renting and leasing or certain financial services.
Input tax deduction for advance VAT returns
How exactly is the input tax deducted? Every entrepreneur who is liable for sales tax not only has to submit an annual declaration, but also has to register the sales tax regularly. Put simply, this means that the tax office is informed of how much sales tax was levied in the period. In the course of this, you will also be asked how much sales tax the company itself has paid to others.
The advance VAT return is an important and quite complex topic. We have therefore prepared and summarized everything that is important and worth knowing in our contribution to advance VAT returns!
Sales tax return – example
The easiest way to explain the input tax deduction process is with an example.
The example GmbH generates 10,000 euros in net sales in one month and also charges 19% sales tax, i.e. 1,900 euros. These 1,900 euros were thus paid by customers of the example GmbH to the example GmbH in addition to the 10,000 euros.
This month, however, the example GmbH also purchases services with a net value of 5,000 euros from other companies that have also billed an additional 19% sales tax. In total, the 5,000 euros were paid plus an additional 950 euros in sales tax.
As a result, sales tax of 1,900 euros was levied and sales tax of 950 euros was paid. There is a difference of 950 euros, which must be paid to the tax office as a result of the advance VAT return. This amount is also known as the sales tax payable load.
When is it worthwhile to use the input tax deduction and to forego the small business regulation?
The small business regulation makes life easier for many companies. There is no need to create complicated advance sales tax returns, the accounting itself is simplified and these advantages also have a positive effect on the processing time in accounting.
But it can also have advantages to forego the small business regulation. This is particularly the case when large investments are made where the sales tax to be paid is considerable. Anyone who voluntarily waives the small business regulation can record the sales tax paid as a business expense. This thus lowers the tax base and reduces the income tax burden.
Focus on competition and customers
Anyone considering opting for regular taxation should also take a look at their own customer structure. If no sales tax has to be charged, the services can possibly be offered cheaper than the competition, which has to pay 19 percent tax of the total amount. If the customers are predominantly companies, this factor does not apply, as sales tax is only a transitory item for these customers.
Also to be considered is the subjective perception of customers. By referring to the small business regulation, the performing company may appear younger or smaller. This can be perceived negatively by some customers or it can simply not play a role. The final assessment of the situation is therefore up to everyone, because both standard taxation and small business regulation have various advantages and disadvantages.
If you are new to the entrepreneurial life, you may be overwhelmed with the input tax deduction at first. The offsetting of sales tax, the subsequent forwarding to the tax office and the offsetting in the course of the sales tax advance notification sounds complicated at first. However, if you have done this process yourself a few times, you know that it is child’s play and that not much can go wrong. If you are uncertain, you can of course have a professional tax advisor prepare the pre-notification. Corresponding accounting software also supports the creation of advance VAT returns and helps to keep an eye on all relevant items.
Small business owners who do not have to charge sales tax can consider voluntarily switching to regular taxation. Here it is important to assess the advantages and disadvantages individually and decide in peace.
It is important to always have a good grip on all matters relating to input tax deduction, since errors relating to the VAT levied or vice versa, when it comes to the offsetting input tax deductions, can always lead to bureaucratic difficulties.