No income tax liability for private photovoltaic systems

Anyone who operates a small photovoltaic system will be able to do so tax-free in the future. The requirement to report this income on your tax return has been eliminated, the Ministry of Finance announced in a new guidance letter on June 2, 2021. However, caution is advised, as filing this claim may have negative implications for past tax years. Your tax advisor in Düsseldorf explains the changes.

Option for every photovoltaic system owner

Owners of single-family and two-family homes, or even multi-family homes with a photovoltaic system in operation, have reason to celebrate. To take advantage of this change in the law, however, the house may only be used for commercial purposes to a limited extent. A home office does not fall under this exception. Tenants who own a photovoltaic system can also make use of the simplified rule. Owners of combined heat and power plants with a capacity of up to two kilowatts are also exempt from the reporting requirement. However, with this change in tax law, those affected can choose whether they wish to take advantage of the exemption. It is not always worthwhile to do so. More on this later in this article.

Systems with a capacity of up to 10 kilowatts

Income from a photovoltaic system is no longer subject to mandatory taxation if the system’s capacity does not exceed 10 kilowatts, it is located on the owner’s own home used for residential purposes, and it was purchased after 2003 or has been in operation for more than 20 years. In this case, the system is referred to as a “system that has exhausted its subsidies.” It is important to note that this option applies only if the electricity generated is used solely for personal residential purposes or fed into the public grid. The new regulation does not apply if the electricity is used by a tenant or consumed for the owner’s own commercial purposes.

Single Business Operation

The tax authorities consider all photovoltaic systems and combined heat and power plants owned by a taxpayer to constitute a single business operation. This rule also applies if the photovoltaic systems are located on different properties. For assessment purposes, the output of all systems is added together and must not exceed the 10.0 kW/kWp limit in total. It should be noted that taxpayers cannot file an application for individual systems.

Tax-related option

To take advantage of the new option—because you no longer wish to report the income from your photovoltaic systems on your income tax return—you can submit an informal application to your tax office effective immediately. The application is time-limited. The tax office will then assume, without further review, that there is no intention to make a profit from the system. It thus presumes what is known as a “tax hobby.” This means that the individual taxpayer does not have to submit an income-excess-of-expenses calculation for the operation of the system. Revenue from the sale of electricity is no longer taxed, and the system does not have to be included in business assets.

But be careful, because the regulation is always applied retroactively. Past tax years are also affected by the change if the tax assessment has not yet become final. This means that if, for example, a tax assessment is subject to review, the gains and losses from photovoltaic operations will be eliminated. Thus, if losses were claimed due to the purchase of the system, these can only be taken into account if the tax assessments are already final. In other cases, there is a risk of high back taxes and interest payments. However, it is also possible that the taxpayer has generated profits in past years and their tax assessments are still “provisional.” In this case, tax refunds may result.

The new option has no effect on sales tax. If you cannot make use of the small business regulation because your revenue is too high, you can still be exempt from income tax liability.

Subsidized Equipment

Systems that have exhausted their subsidies represent a special case. For these, you can switch to hobby status at the earliest after 20 years of operation. The assessment period plays a role here. Starting from the tax assessment period in which the guaranteed feed-in tariff was last granted, the option may then be exercised.

Tax Consulting in Düsseldorf and Oberhausen

To successfully implement the legal changes regarding your specific case, please contact our team. With our offices in Düsseldorf and Oberhausen, we offer specialists in your field. Contact us to schedule an initial consultation.