Simplified Accounting: Tax Advantages and Disadvantages

Simplified Accounting for the UG: Curse or Blessing from a Tax Perspective?

The limited liability entrepreneurial company (Unternehmergesellschaft, UG) is the entry point into the world of corporations for many founders and startups. One of the advantages the UG offers over its "larger sister," the GmbH, is the option of simplified accounting. But what exactly does this mean from a tax perspective? What are the advantages and disadvantages of simplified accounting? And what should be considered when transitioning to full accounting or selling the UG?

What is Simplified Accounting?

In principle, all merchants are required to keep accounts according to § 238 of the German Commercial Code (HGB). This also applies to the UG as a corporation. However, there is relief for small UGs: they can apply simplified accounting according to § 241a HGB if they do not exceed at least two of the following three criteria:

• Annual sales revenue up to €600,000
• Balance sheet total up to €300,000
• Up to 10 employees on average per year

With simplified accounting, only cash receipts and payments as well as receivables and liabilities need to be recorded. Double-entry bookkeeping with a balance sheet and profit and loss statement is not required. Instead, a cash-basis profit and loss statement (Einnahmenüberschussrechnung, EÜR) according to § 4 para. 3 of the German Income Tax Act (EStG) suffices.

The EÜR compares operating income with operating expenses. The difference is the profit or loss. Unlike full accounting, no accruals, provisions, or depreciation are considered. The cash basis principle applies: income and expenses must be recorded in the year they are actually paid.

Advantages of Simplified Accounting

The greatest advantage of simplified accounting is its simplicity. The records are less complex and time-consuming than double-entry bookkeeping, saving costs for accounting and tax consulting.

From a tax perspective, simplified accounting can also offer benefits:

• Easier utilization of allowances and flat rates: Many allowances and flat rates (e.g., home office, travel expenses, entertainment costs) can be claimed more easily in the EÜR than in a balance sheet. This is because actual payments are decisive, not period-appropriate allocation.

• More flexible profit distribution: With the EÜR, profits can be more easily deferred to the following year by issuing or paying invoices later. This allows tax burdens to be spread over multiple years. In full accounting, this is limited by the realization principle.

• Use of trade tax allowance: The UG, as a corporation, is generally subject to trade tax. However, there is an allowance of €24,500 that can be more easily utilized in the EÜR because the taxable profit counts here, whereas the commercial profit in the balance sheet is often higher.

• Application of retained earnings privilege: Retained earnings of corporations benefit from a reduced tax rate of approximately 30% (corporate income tax, solidarity surcharge, and trade tax). This retained earnings privilege is easier to apply in the EÜR since the profit is often lower than in the balance sheet.

Disadvantages and Risks of Simplified Accounting

As tempting as simplified accounting may be, there are also some disadvantages and risks to consider.

• No provisions possible: In the EÜR, provisions for uncertain liabilities or impending losses cannot be formed. This can lead to higher tax burdens if corresponding expenses arise later.

• Higher additional tax payments possible: Due to the cash basis principle, distortions can occur if income and expenses fall into different years. This can lead to higher tax back payments if income predominates in one year.

• Lower transparency and control: The EÜR provides less insight into the company’s economic situation than a balance sheet. In particular, the development of assets and liabilities is harder to track, which can complicate company control and management.

• Difficulties in sale: For potential buyers, a UG with simplified accounting is often less attractive than one with full accounting. The EÜR offers less transparency and complicates due diligence. Valuation of the company is also more difficult, which can lead to a lower purchase price.

• Obligation to switch to full accounting: The criteria for simplified accounting must be checked annually. If exceeded, full accounting becomes mandatory. The transition must then be carefully planned and executed to avoid tax disadvantages.

Transition to Full Accounting: What to Watch For?

Sooner or later, most UGs reach a point where they must or want to switch to full accounting—either because size criteria are exceeded or because a sale or financing is imminent. There are several tax pitfalls to watch for during this transition.

• Tax-neutral reconciliation statement required: Transitioning from the EÜR to full accounting requires a tax-neutral reconciliation statement according to § 60 para. 4 of the German Income Tax Implementation Regulation (EStDV). This transfers the values from the EÜR into the balance sheet without revealing hidden reserves. This requires careful documentation and coordination with the tax authorities.

• Review of asset recognition: All assets not included in the EÜR must be recorded and valued during the transition. These may include self-created intangible assets (patents, software) or low-value assets. Careful review and, if necessary, subsequent recording are required.

• Formation of provisions and accruals: With the transition to full accounting, provisions (e.g., for warranties, litigation risks) and prepaid/ deferred items must be formed for the first time. This can lead to higher effort in the transition year, which must be considered for tax purposes.

• Valuation of inventories and receivables: Inventories and receivables are often not or only partially recorded in the EÜR. During the transition, they must be inventoried and valued as of the balance sheet date. This may reveal hidden reserves or burdens that affect the taxable result.

• Consideration of deferred taxes: The switch to full accounting can create differences between the commercial and tax balance sheets, leading to deferred tax assets or liabilities. These must be determined in the reconciliation statement and reported in the balance sheet.

• Distinguishing contributions and withdrawals: Contributions and withdrawals by shareholders are often not clearly distinguished in the EÜR. During the transition, they must be identified and recorded separately to correctly reflect equity development.

Tax-Optimized Structuring in Company Sales

When selling the UG, the question arises whether to maintain simplified accounting or switch to full accounting beforehand. This depends on various factors:

• Consider buyer interests: Many buyers prefer a UG with full accounting because it offers more transparency and security. Early switching can facilitate sales negotiations and increase the price.

• Uncover hidden reserves: Switching to full accounting reveals hidden reserves, e.g., in assets or receivables. This can increase the company’s value but also leads to higher tax burdens.

• Utilize loss carrybacks: Past losses can be more easily offset against future profits by switching to full accounting. This applies especially to loss carrybacks, which are not possible under the EÜR.

• Optimize timing and form of sale: Depending on buyer structure and interests, an asset deal or share deal may be advisable. In an asset deal, individual assets are transferred, revealing hidden reserves. In a share deal, shares in the UG are sold, which requires full accounting. Careful consideration and planning with experts are essential.

Example: UG with Simplified Accounting is Sold

The ABC UG (limited liability) was founded three years ago and has so far applied simplified accounting. Sales revenue has always been below €600,000, the balance sheet total below €300,000, and no employees were employed. The founder and sole shareholder now wants to sell the UG.

Last year, the UG reported the following figures:

• Operating income: €580,000
• Operating expenses: €510,000
• Profit according to EÜR: €70,000

During due diligence by the potential buyer, the following hidden reserves were identified:

• Uncapitalized patents: €50,000
• Undepreciated office and business equipment: €30,000
• Unvalued inventories: €20,000

This results in a company value of €170,000 (€70,000 profit plus €100,000 hidden reserves).

Option 1: Sale without prior full accounting (Asset Deal)

The UG sells the individual assets (patents, equipment, inventories) to the buyer. This reveals hidden reserves of €100,000, which are subject to corporate income tax (15%) and solidarity surcharge (0.825%). Trade tax does not apply as the allowance of €24,500 is not exceeded.

Tax calculation:

• Profit according to EÜR: €70,000
• Hidden reserves revealed: €100,000
• Trade tax: €0
• Corporate income tax (15% of €170,000): €25,500
• Solidarity surcharge (5.5% of €25,500): €1,402.50
• Total tax burden: €26,902.50

The net proceeds after tax amount to €143,097.50 (€170,000 - €26,902.50).

Option 2: Sale with prior full accounting (Share Deal)

The UG voluntarily switches to full accounting and discloses the hidden reserves of €100,000 in a reconciliation balance sheet. This increases equity, raising the value of the company shares and thus the purchase price.

Tax calculation:

• Profit according to EÜR: €70,000
• Hidden reserves revealed: €100,000
• Trade tax: €0
• Corporate income tax (15% of €170,000): €25,500
• Solidarity surcharge (5.5% of €25,500): €1,402.50
• Total tax burden: €26,902.50

The shareholder then sells his shares in the UG for €170,000. The capital gain of €170,000 is subject to the partial income procedure under § 17 EStG, meaning 60% of the gain (€102,000) is taxed at his personal income tax rate.

Assuming a tax rate of 42%, the tax burden is:

• 42% of €102,000 = €42,840

The net proceeds after tax amount to €127,160 (€170,000 - €42,840).

However, the shareholder also receives a tax refund for the UG amounting to €26,902.50, which results from corporate income tax and solidarity surcharge at the company level. This refund is included in the purchase price, resulting in total proceeds of €154,062.50.

Conclusion

The example calculations show that switching to full accounting beforehand and conducting a share deal can increase net proceeds after tax. However, this also involves higher effort and careful planning. Which option makes sense depends on many factors, such as buyer structure, financing method, or the shareholder’s personal tax burden.

In any case, early consideration of tax aspects and professional support from tax advisors and auditors are indispensable to optimally structure the company sale. Only those who understand and correctly adjust the key levers can maximize their returns.