2. Be careful when it comes to deductions
Sole proprietors must be particularly carful when declaring deductions. It is important for self-employed people to clearly separate private from business expenses. In principle, only expenses incurred for business purposes may be deducted. While a flight to visit a factory abroad may under certain circumstances be deductible as a business-related expense, the costs of a birthday party on a private jet certainly do not qualify for a reduction. All deductible expenses must be substantiated by receipts.
Sole proprietors have the right to offset profit costs and losses against business earnings and thereby reduce their taxable income. Losses from up to seven previous tax periods may be deducted. However, unlike corporations, sole proprietors cannot deduct taxes paid from net income. Furthermore, special rules apply to certain categories of deductions.
Depreciation: Business-related expenses such as the purchase of a vehicle are eligible to reduce the tax burden, but cannot be claimed in full in the year of purchase. Rather, depreciation expenses may only be deducted over several years.
Accruals: Accruals, for example for legal costs or guarantees, can reduce the tax burden under certain circumstandes. The deductibility depends on the type of claim and is usually limited in percentage terms.