The Investitionsabzugsbetrag (investment deduction allowance) under § 7g EStG (German Income Tax Act) may be the most underrated liquidity instrument available to Germany's Mittelstand: up to 50 percent of planned investments reduce taxable profit years before the asset is ever purchased. Combined correctly with the special depreciation allowance and declining-balance depreciation, it creates a tax deferral effect that pre-finances a substantial share of the investment out of tax savings.
How § 7g EStG Works
Businesses with profits of up to €200,000 in the deduction year may, for future acquisitions of depreciable movable fixed assets, deduct up to 50 percent of the anticipated acquisition or production costs from taxable profit — off-balance-sheet, before a single euro has changed hands. The total of all deductions is capped at €200,000 per business . The investment must then be made within three financial years ; the asset must be used at least 90 percent for business purposes through the end of the year following acquisition — leasing it out is permitted.
If the investment never happens, the deduction is reversed retroactively in the year it was claimed — with back-payment interest. The IAB is therefore no tax giveaway, but an interest-bearing tax deferral that demands disciplined planning.
50% of planned costs deductible · profit threshold €200,000 · maximum €200,000 per business · investment window 3 years · usage requirement: at least 90% business use, leasing permitted.
The Turbo: 40 Percent Special Depreciation
In the year of acquisition, the special depreciation allowance under § 7g para. 5 EStG kicks in: for acquisitions from 2024 onwards, it amounts to up to 40 percent of the acquisition costs (as reduced by the IAB), freely allocable across five years. Together with the reduced book value, this delivers a depreciation effect of up to roughly 70 percent of the original investment amount in the year of acquisition — and since the Immediate Investment Programme, you can additionally layer on declining-balance depreciation of up to 30 percent of the residual value.
Worked Example: A €100,000 Machine
- Year 1 (planning): An IAB of €50,000 reduces profit — at a marginal rate of around 45%, that is roughly €22,500 in tax savings before a single euro is invested.
- Year 3 (acquisition): The IAB is added back while acquisition costs are simultaneously reduced to €50,000; on top of that, 40% special depreciation (€20,000) plus regular or declining-balance depreciation.
- Result: The tax authorities finance a substantial part of the investment through front-loaded tax relief — liquidity that would otherwise be tied up in prepayments.
Planning Opportunities from Practice
- Smoothing profit spikes: The IAB works retroactively as a brake on tax progression — and can even be deployed as a compensating instrument during a tax audit, as long as the intention to invest is plausible.
- Photovoltaics and electric vehicles: Movable assets such as business PV systems (where not tax-exempt under § 3 No. 72 EStG) and electric vehicles are classic IAB cases; for EVs, run the numbers against the new 75 percent immediate write-off.
- Multiple businesses, multiple caps: The €200,000 ceiling applies per business — with several trading operations or partnership interests, the available headroom multiplies.
- Watch the profit threshold: The €200,000 threshold applies uniformly across all categories of business income and is a cliff-edge limit — one euro over, and the entire deduction is lost. Managing profit in the deduction year is therefore part of the planning.
Frequently Asked Questions
Who can use the Investitionsabzugsbetrag?
Sole traders, partnerships and corporations with taxable profits of up to €200,000 in the year of deduction — regardless of how profit is determined.
What happens if the investment is not made?
The deduction is reversed retroactively in the year it was claimed, triggering back taxes plus interest. The IAB should therefore only be claimed for concretely planned investments.
Can the IAB be combined with declining-balance depreciation?
Yes. The IAB (50%), the special depreciation allowance (40%) and the declining-balance depreciation under the Immediate Investment Programme (up to 30%) can all be stacked — this combination delivers the strongest front-loading effect available under current law.
More than 20 years advising entrepreneurs, investors and family businesses. Reserved tax services are provided by our partner tax firm, TABAK Steuerberatung.
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