Term and definition of expenses
According to German law, expenses are all outflows of funds that occur as part of individual or business activities. They are one of the central categories for describing and analyzing corporate and private financial flows. Basically, expenses must be distinguished from other related terms such as expenditures and costs: while expenses refer to the actual outflow of cash, expenditures record the consumption of value in accounting, and costs refer to the operational consumption of value for providing business services.
Legal basis for expenses
Expenses in tax law
In German tax law, the term ‘expenses’ plays a special role, for example in distinguishing between business expenses (§ 4 para. 4 EStG) and income-related expenses (§ 9 EStG). Business expenses are all expenditures incurred by the business. As part of profit determination, they reduce the tax base. In contrast, income-related expenses are expenses incurred to acquire, secure, and maintain receipts as part of surplus income, especially relevant for employees and landlords.
Business expenses (§ 4 para. 4 EStG)
This includes all expenses incurred by the business, that is, those objectively economically connected to the business. Private expenses must be separated and are not deductible. Examples of business expenses include material costs, personnel costs, depreciation, but also interest payments and business taxes.
Income-related expenses (§ 9 EStG)
Income-related expenses are expenses that serve to acquire, secure, or maintain income. Typical examples are commuting costs to the workplace, membership fees to professional associations, or expenses for specialist literature.
Non-deductible expenses
Tax law also recognizes expenses that are explicitly non-deductible, such as costs of private living (§ 12 EStG), fines, or certain expenses for gifts (§ 4 para. 5 EStG).
Expenses in commercial law
Within the framework of commercial law, expenses are primarily considered in the context of accounting and ongoing bookkeeping. The term is closely linked to payment transactions here. An expense leads to a reduction in the stock of liquid assets or receivables.
Expenses in public administration
According to the budgetary law of public bodies, expenses as defined by the budget regulations (e.g. § 34 BHO) are all payments that reduce public assets. They are contrasted with revenues and determine the execution of the budget.
Distinction from expenditure, payment, and cost
Expenses vs. payments
Expenses include any reduction in the stock of cash and cash equivalents, regardless of whether this is associated with an expense or an investment. Payments in a narrower sense refer to the actual transfer or cash payment.
Expenses vs. expenditure
Expenditure refers to the total value of all goods and services consumed that is taken into account in accounting. An expense becomes an expenditure when the consumption of value is allocated to a period and thus affects profit and loss.
Expenses vs. costs
Costs are business-related, period-based consumption of goods or services at acquisition or production cost. Not all expenses are costs, because non-business or extraordinary payments, such as tax payments outside the business sphere, are not considered costs.
Legal significance and practical examples
Corporate law
In corporate law, expenses are crucial for liquidity planning and maintaining solvency (avoiding insolvency). Proper documentation of expenses is a prerequisite for proper bookkeeping in accordance with §§ 238 ff. HGB.
Insolvency law
In insolvency law, expenses are considered to determine insufficiency of assets. Impermissible expenses during insolvency can lead to avoidance or liability of the management.
Criminal liability for unlawful expenses
Impermissible or unlawful expenses can, among other things, constitute factual elements for embezzlement (§ 266 StGB) or breach of budgetary obligations, especially in the public sector.
Labor law
In labor law, expenses are, for example, expenditures for personnel management and staff development. Reimbursement of certain employee expenses is either taxable or tax-free, depending on the design of wage tax or social security obligations.
Accounting treatment of expenses
Every expense must be documented with receipts (§ 146 AO), and for companies, this is done through cash books and bank books. For freelancers, within the framework of cash basis accounting (§ 4 para. 3 EStG), the expenses are recorded at the time the payment is made.
International aspects of expenses
In other jurisdictions, such as under the International Financial Reporting Standards (IFRS), a distinction is made between ‘expenditures’ and ‘expenses’. For accounting purposes, international standards may have to be considered alongside national law, particularly in connection with group reporting.
Summary
Expenses are central transactional figures in almost all areas of the economy and are subject to specific legal regulations. They affect both private individuals as well as companies and public administrations and are of considerable importance in different contexts – such as tax law, commercial law or insolvency law. Foresighted companies and private individuals ensure their economic stability and legal certainty by accurately documenting and legally classifying their expenses.
Frequently asked questions
What evidence is required for the tax recognition of expenses?
For tax recognition of expenses, you must generally be able to present individual receipts such as invoices, receipts, or contracts that document the payment transaction and its purpose. These documents must meet the legal minimum requirements, which in particular means they must show the name and address of the supplying business, the date of issue, the type and scope of the service, as well as the amount and, if applicable, the VAT (§ 14 UStG). For some business expenses, such as entertainment costs, stricter documentation obligations apply: for example, details on the occasion, participants, and amount of the entertainment costs are required (§ 4 para. 5 no. 2 EStG, R 4.10 EStR). Electronic receipts are now generally permitted, but must be stored unaltered, completely, and legibly for the legal retention period of ten years (§ 147 AO, GoBD).
Are there legally recognized lump sums for certain categories of expenses?
For some categories of expenses, lawmakers have introduced lump sums that can be claimed for tax purposes without requiring individual proof for each expense. Examples are the distance allowance for journeys between home and the first place of work (§ 9 para. 1 no. 4 EStG), per diem allowances for external work assignments (§ 9 para. 4a EStG), or also fixed amounts for certain income-related expenses. The use of such lump sums requires that the underlying conditions, such as an external assignment, can be demonstrated. For other expenses, for instance specialist literature, only the actual amount can be claimed as income-related expenses or business expenses, provided this can be substantiated.
What deadlines apply for claiming expenses in the tax return?
Taxpayers must declare their expenses as part of their respective tax return for the relevant calendar year. The standard deadline for submitting the income tax return is set by law (§ 149 AO). If expenses were incurred in the relevant calendar year, they must be claimed in that year; subsequent recognition in later years is only possible in exceptional cases via correction or amendment of the tax notice. Tax-relevant documents must be retained for at least ten years either in original or digital form (§ 147 AO) in case requested later by the tax office.
When are expenses classified as business and when as private?
Legally, a distinction is made between business and privately motivated expenses according to the so-called causation principle. Business expenses within the meaning of § 4 para. 4 EStG are those incurred by the business or professional activity. The objective connection with the business or income generation is decisive. Mixed expenses (e.g. journeys used both privately and for business) must be allocated, provided a split is possible and can be carried out with reasonable effort. If splitting is not possible, the entire amount is considered non-deductible (see Federal Fiscal Court decision of 21.9.2009, GrS 1/06).
Are all expenses subject to tax deduction restrictions?
No, not all expenses can be claimed without limitation for tax purposes. The Income Tax Act excludes certain expenses fully or partially as business or income-related expenses (§ 4 para. 5 EStG), such as gifts exceeding 35 euros per year and recipient, or ineligible entertainment expenses. For certain business expenses, such as travel expenses, there are special limitations and evidentiary requirements. For home offices, for example, the tax office recognizes costs only to a limited extent or only upon proof of necessity and exclusive use (§ 4 para. 5 no. 6b EStG), but to a maximum of 1,250 euros per year.
What is the obligation to separate accounts for business expenses?
Legally, there is no explicit statutory requirement to separate private and business expenses for sole proprietors or freelancers, but strict separation is strongly recommended in the interest of proper bookkeeping and is indirectly required by lawmakers (§ 238 HGB, §§ 140 ff. AO). Corporations, on the other hand, are required to process all business payments exclusively through business accounts (§ 41 GmbHG, § 6 AktG). Improper mixing can not only lead to tax disadvantages, but also to the denial of business expenses by the tax authorities.
How are non-verifiable expenses treated for tax purposes?
Basically, non-verifiable expenses are not deductible for tax purposes, as tax law follows the principle ‘No accounting without documentation’ (§ 146 AO, GoBD). In rare exceptional cases, the tax authorities allow recognition for minor cash expenses on the basis of self-created receipts if the business purpose and amount of the expense can be plausibly and comprehensibly demonstrated (e.g. travel fares, tips). The requirements for documentation are high and the tax offices scrutinize self-created receipts with particular care. Lump sums that can regularly be deducted without receipts apply only to certain professions or types of expenses, such as per diem increases for meals.
