Dispute on Intent to Create an Accruing Reserve

You can create an accruing reserve fund to write off money for expenditure that you in fact defer for up to two years. In other words, a reserve fund of money can be depreciated for tax write off purposes even where the depreciating purchase is first made after two year’s time. This contested issue is regulated under §7g III 3 Einkommensteuergesetz (= Income Tax Act) but was rejected by the tax office on the grounds that the tax payer showed no advance intention to ultimately purchase anything with the accruing reserve. The dispute was brought before the FG Düsseldorf with decision made on October 26, 2006 (re 15 K 1096/05 E).


This method of write-off is available for taxpayers not required to file tax returns with formal balance sheets for long-term business assets. Non-incorporated businesses usually do not need to submit balance sheets. An accruing reserve requires among other things that the item to be accrued will “probably” be purchased by the end of two years at the latest. The accruing reserve must be dissolved after two years after commencement of this method of depreciation. But when is this “probability” fixed in one’s mind?


But how can someone else know that you do intend to buy something? The law does not expressly regulate if and when a taxpayer need prove an “intention” to purchase a long-term asset. Thus the taxpayer is not required to prove his intention. Nevertheless, he is obligated to adequately determine his planned investment sufficiently.


So how do adequately demonstrate that you intend to purchase a long-term asset? Before answering, we need to understand what constitutes a long-term asset. We need to differentiate between long-term and short-term assets. The short-term asset is any item with a gross sale value less than € 410 (§6 II 4 Income Tax Act). Short-term assets can be written off in the year of purchase. So, if you plan to purchase a new computer with the value of € 799 for business use, you could be creating an accruing reserve fund to finance the purchase price. You will show this intention by creating such depreciation.



Published on the old CMS:2007/03/10
Read on the old CMS till November 2008: number got lost

Additional information