What is the investment deduction amount (IAB)?

With the investment deduction amount under § 7g EStG, small and medium-sized enterprises can claim planned investments in movable fixed assets for tax purposes in advance. This reduces taxable profit, improving liquidity and easing financing.

Amount of deduction

For the 2025 tax year, up to 50% of the expected acquisition or production costs can be deducted from profits as an investment deduction amount.

Conditions in 2025

A business can create an IAB in 2025 if:

• the profit in the financial year does not exceed 200.000 Euro (before deduction of the IAB),
• regardless of whether the profit is determined by cash accounting or balance sheet accounting.

Special regulations for previous years (before 2020)

• Traders using balance sheet accounting: Business assets max. 235.000 Euro (2009/2010: 335.000 Euro)
• Cash accounting (e.g. freelancers): Profit max. 100.000 Euro (2009/2010: 200.000 Euro)
• Farmers and foresters:
  • Economic value max. 125.000 Euro (2009/2010: 175.000 Euro)
  • Alternatively: Profit max. 100.000 Euro (for cash accounting)

Note: Extended investment periods for old cases

The regular period for using an investment deduction amount is three years. Due to the Corona pandemic, this period was extended for certain years:

• IAB from 2017 or 2018: Deadline until 31.12.2022. Latest possible investment by 31.12.2022.
• IAB with regular deadline 2020 or 2021: Extension to up to 4 or 5 years. Latest possible investment: by 2025.
• IAB with regular deadline 2022: Extension to up to 6 years possible. Latest possible investment: by 2025.

These regulations apply exclusively to investment deduction amounts created before or by 2022. For IAB from 2023, the regular three-year period under § 7g para. 3 EStG applies again.

What is the investment deduction amount (IAB)?

When are investment deduction amounts added back?

If the asset for which an investment deduction was made is purchased or manufactured within the 3-year investment period, the following applies (§ 7g para. 2 EStG):

• The investment deduction made for the purchased asset must now be added back to increase profit off-balance sheet. The addition amounts to 40 percent (until 2019) or 50 percent (from 2020) of the expected acquisition or production costs, but is limited to the deducted amount for the asset. The relevant details must be entered depending on the year in which the investment deduction was made.

• The actual acquisition or production costs of the asset are reduced to decrease profit by the previously claimed investment deduction. However, the reduction must not exceed the investment deduction. This reduction amount must be recorded in the accounts and entered in SteuerGo under "Business expenses > Depreciation" in the line "Reduction amounts according to § 7g para. 2 sentence 2 EStG".

Note: If investment deductions were considered in 2017, they must have been invested by 31.12.2020 at the latest - or they must be reversed and interest applied. In many cases, such an investment is now not possible as planned due to the Corona crisis.

To avoid these negative effects and to increase the liquidity of companies, the deadline for investment deductions, whose three-year investment period expires in 2020, is extended by one year to four years (§ 52 para. 16 EStG, inserted by the "Second Corona Tax Assistance Act" of 29.6.2020). This gives taxpayers who want to invest in 2020 but cannot due to the Corona crisis the opportunity to make the investment in 2021 without negative tax consequences (reversal, interest on the tax demand).

When are investment deduction amounts added back?

How is the investment deduction amount settled?

The dissolution of the investment deduction amount has different effects in three possible scenarios:

(1) Actual costs match the projected investment costs:
If the projected investment costs match the actual costs, there are no profit effects in the financial year of acquisition or production when the maximum reduction in acquisition or production costs is utilised. The off-balance-sheet profit-increasing addition can be fully offset by the profit-reducing reduction of the acquisition or production costs of the invested asset.

(2) Actual costs are higher than the projected investment costs:
If the actual costs are higher than the projected investment costs, the maximum possible profit-reducing reduction of the assessment basis exceeds the investment deduction amount taken into account in a previous year. However, there is no profit-reducing expense for the difference, as the reduction of acquisition or production costs may not exceed the investment deduction amount actually claimed.

(3) Actual costs are lower than the projected investment costs:
If the actual costs are lower than the projected investment costs, the maximum investment deduction amount cannot be fully added back, as the addition is limited to 40 percent (up to 2019) or 50 percent (from 2020) of the (lower) investment costs. The remaining balance must be retrospectively recorded as profit-increasing in the original year after the investment period has expired. Interest on the tax demand is calculated at 0.5% per month from the 15th month after the original year (§ 7g para. 3 EStG).

Note: If investment deduction amounts were taken into account in 2017, they must be invested by 31.12.2020 at the latest - or they must be dissolved and interest applied. In many cases, such an investment is now not possible as planned due to the Corona crisis.

To avoid these negative effects and to increase the liquidity of companies, the deadline for investment deduction amounts, whose three-year investment period expires in 2020, is extended by one year to four years (§ 52 para. 16 EStG, inserted by the "Second Corona Tax Assistance Act" of 29.6.2020). This gives taxpayers who want to invest in 2020 but cannot do so due to the Corona crisis the opportunity to make the investment in 2021 without negative tax consequences (reversal, interest on the tax demand).

How is the investment deduction amount settled?