Is it possible to choose the net income method retrospectively?
Taxpayers who are not required to keep accounts and do not voluntarily keep books and prepare financial statements have the right to choose between the business asset comparison under section 4 (1) EStG and the cash basis accounting under section 4 (3) EStG:
- A taxpayer not required to keep accounts has - according to previous opinion - effectively exercised their right to determine profits through inventory comparison under section 4 (1) EStG only when they prepare an opening balance sheet, set up commercial bookkeeping, and make a financial statement based on inventories.
- If, on the other hand, the taxpayer has only recorded business income and expenses, they have exercised their right to determine profits through cash basis accounting under section 4 (3) EStG based on this actual practice.
According to the new opinion, the entrepreneur can also exercise the right after the end of the year, in principle indefinitely until the tax assessment becomes final. If the entrepreneur then prepares an annual financial statement, they only decide on profit determination through accounting at that point - and not already with the establishment of bookkeeping at the beginning of the financial year (BFH ruling of 19.3.2009, BStBl. 2009 II p. 659).
However, the right is restricted by certain conditions (section 4 (3) sentence 1 EStG). For example, the choice of cash basis accounting is no longer possible after the financial statement has been prepared. Similarly, the choice of profit determination through inventory comparison is excluded if the taxpayer has not prepared an opening balance sheet and set up commercial bookkeeping promptly at the beginning of the profit determination period. The choice between the types of profit determination may also be excluded if the taxpayer is bound by a choice made for a previous financial year.
Note: This interpretation also serves the simplification purpose of cash basis accounting. The taxpayer can opt for cash basis accounting to avoid preparing the financial statement, even if they have already set up bookkeeping. For the tax office, it is only important that it actually receives the cash basis accounting after the choice has been made.
