Mixed Expenses

Mixed expenses: Definition, legal basis, and delineation

Definition: What are mixed expenses?

Mixed expenses are expenditures that arise from both private and business or professional reasons. They are characterized by the fact that they cannot be clearly assigned solely to either personal living expenses or exclusively to the business or professional sphere, but instead serve both areas jointly. Mixed expenses are particularly relevant in tax law and concern the deductibility of costs as operating expenses, income-related expenses, or special expenses.

Legal basis of mixed expenses

Income Tax Act (EStG) and deduction prohibition

The key statutory provision regarding mixed expenses in Germany is found in Section 12 No. 1 of the Income Tax Act (EStG). According to this provision, expenses for private living purposes may generally not be deducted as business expenses, income-related expenses, or special expenses even if they are incurred to promote one’s profession or activity. This deduction prohibition is a significant limitation in German income tax law and is decisive for the treatment of mixed costs.

Exceptions to deductibility

If an expense is incurred exclusively or at least predominantly for business or professional reasons, it may be recognized as a business expense or income-related expense. If a clear separation between the business and private portions is possible, the respective cost components must be allocated accordingly (Section 4 (5) EStG analogously).

Allocability according to case law

According to the highest courts, particularly the Federal Fiscal Court (BFH), allocation of mixed expenses is permissible if an objective and comprehensible method is available for allocation. Examples of appropriate allocation criteria include duration of use, proportion of space, number of participants, or kilometers driven.

If no sufficiently precise and objective allocation is possible, the deduction of operating or income-related expenses is entirely denied (see BFH, judgment of 21.09.2009, file no. GrS 1/06).

Typical scenarios involving mixed expenses

Mixed expenses can arise in various contexts. Below is an overview of central application cases.

Travel expenses with a private component

A classic example is a business trip with a private component, such as extending the business trip for private recreational purposes (‘add-on vacation’). The costs must then be split accordingly: pure travel expenses for the business portion (e.g., flight, additional meal allowance, accommodation during the business segment) are deductible, while no tax deduction is permitted for the private portion.

Acquisition and use of assets used for both purposes

Assets such as cars, computers, mobile phones, or even home offices can be used both for business and private purposes. The cost shares must be split according to actual usage (e.g., verified by logbook or time records). Only the business or professional share is tax-deductible as an operating or income-related expense.

Entertainment expenses

Expenses for entertainment may also be partially mixed, e.g., in the case of business dinners where family members are present. In such cases, splitting the costs based on the number of persons and business reason is essential.

Distinction from other types of costs

Business, professional, and private expenses

• Pure business expenses/income-related expenses: Entirely business or professionally motivated, such as office supplies or literature of purely technical content.
• Mixed expenses: Both privately and business/professionally motivated.
• Pure private expenses: No business or professional reason, such as typical expenses for personal living purposes.

Need for distinction

Precise distinction is essential in tax profit determination and is of great importance for the proper taxation of natural and legal persons.

Criteria and methods for apportioning mixed expenses

Quantitative and qualitative allocation criteria

The allocation is made based on objectively verifiable criteria. Both quantitative factors (such as percentage usage, time shares, number of persons) and qualitative aspects (e.g., the nature and purpose of an activity) may be decisive.

Documentation requirement

Proper documentation of the respective shares is a mandatory prerequisite. Lack of evidence regularly leads to complete loss of tax deduction.

Case law and practically relevant judgments

Precedent case law, in particular from the BFH, has decisively shaped the handling of mixed expenses. Important decisions include those on the requirements for permissible allocation and its limits, as well as on the assessment of proof in individual cases (see BFH GrS 1/06, BFH VI R 51/07).

International perspectives

Mixed expenses also present a challenge in international tax law. Many double taxation agreements provide for special regulations or refer to national provisions on the distinction between private and business spheres.

Practical significance

Mixed expenses are relevant across almost all sectors and professions. They affect both freelancers and business owners, employees and self-employed, and often represent a contentious issue in tax audits.

Literature and further sources

• Income Tax Act (EStG), Sections 4, 9, 12 EStG
• Federal Fiscal Court (BFH), judgments on mixed expenses
• EStG commentaries: Tipke/Lang, Kirchhof/Söhn/Mellinghoff
• BMF letters on travel expenses, home offices, entertainment expenses

Summary: Mixed expenses are costs that can equally be justified professionally/business-wise and privately. Their tax treatment is governed by income tax law and case law. Clear distinction and documentation of the business versus private shares is essential. The subject is complex and of considerable practical importance for both individuals and businesses.

Frequently asked questions

How are mixed expenses treated for tax purposes in a legal context?

Mixed expenses are those that have both a private and a business or professional causative link. Their tax treatment is primarily based on Section 12 No. 1 Sentence 2 of the Income Tax Act (EStG), according to which expenses with mixed causes are generally not deductible as income-related or business expenses insofar as they relate to private living. According to the so-called allocation case law of the Federal Fiscal Court (e.g., judgment of 21.09.2009, GrS 1/06), allocation of the costs into a business/professional and a private portion is, however, possible if an objective and comprehensible separation of the shares can be ensured. This means that the share which is solely for business or professional purposes may be deducted for tax purposes, while the private share is generally not deductible. For mixed expenses where the shares cannot be clearly separated, the deduction prohibition generally applies. Examples of mixed expenses include travel costs with a partially private purpose, purchase costs for computers that are used both privately and professionally, or entertainment expenses with private involvement.

What are the evidentiary requirements for allocating mixed expenses?

For tax recognition of the business or professional share of mixed expenses, the taxpayer has a heightened duty to provide evidence. The tax authorities require clear and comprehensible documentation showing the allocation of the respective cost shares. This can be accomplished, for example, by separate invoicing, detailed records of usage times, logbooks, or similar proof tools. The evidence must be sufficient for the tax office to determine and differentiate the business share of the expenses with certainty. If such evidence is not provided, or not provided sufficiently, there is a risk that the entire expense will not be recognized for tax purposes.

How are travel expenses with mixed reasons allocated?

In the case of mixed travel expenses, i.e., business trips that also contain private elements, the deductibility of costs depends on how the trip duration, itinerary, and the weighting of business and private components are structured. As a general rule, the business or professional components are deductible as business or income-related expenses, provided they can be clearly distinguished. The private portions (e.g., extra nights for private reasons or costs for privately used events) are not tax-deductible. Allocation is typically based on travel duration or by proportionally apportioning costs where time shares can be clearly substantiated. Costs that cannot be clearly separated, such as part of air fare for a trip with predominantly private purposes, are not deductible.

To what extent are mixed expenses in connection with home offices deductible?

Expenses for a home office are a classic example of mixed expenses when the room is used both privately and professionally. Under current law (Section 4 (5) No. 6b EStG and Section 9 (5) EStG), the deduction of costs for a home office is only permissible if the room is used almost exclusively (i.e., more than 90%) for business or professional purposes. If this requirement is not fulfilled, and mixed use occurs, the expenses attributable to this use are entirely non-deductible for tax purposes. Allocation based on square meters or usage times is generally not accepted by the courts, provided business use is below 90%.

Are there industry-specific particularities regarding the treatment of mixed expenses?

Certain professions or industries may face specific particularities in handling mixed expenses. For example, self-employed persons and freelancers often have mixed expenses (e.g., business mobile phone, travel costs for training with a leisure component). For artists or writers, mixed expenses—for instance, for research or inspiration trips—are often assessed by stricter standards. Depending on the profession, tax authorities may accept specific industry-standard forms of evidence or flat-rate rules for splitting costs, e.g., for allocation of telephone expenses. Nonetheless, clear proof and objective separation of business and private shares remains fundamentally required.

Can mixed expenses be claimed for VAT purposes?

For VAT purposes, the treatment of mixed expenses is particularly assessed under Section 15 UStG and the associated administrative rules. If an item is used both for business purposes (taxable and tax-liable sales) and for non-business purposes (private or for tax-exempt sales), input tax deduction is only allowed for the business portion. Allocation is usually based on the actual usage ratio, for example, by estimation with the help of business records or according to objective standards such as time, space, or unit shares. Again: if precise allocation or estimation is not possible, the input tax deduction may be partially or completely denied.

What role do mixed expenses play in determining profits according to Section 4 (3) EStG?

For the cash accounting method under Section 4 (3) EStG, the so-called allocation principle applies strictly to mixed expenses. This means expenses may be deducted only if they are business-related. For mixed expenses, allocation must be carried out where the expenses can be clearly and verifiably divided. The private share is, in any case, non-deductible. The tax authorities also require specific proof here, otherwise the total amount may be classified as non-deductible due to lack of separation.