The loss created by an investment deduction (IAB): offsetting it against salary, carrying it back and carrying it forward

Anyone who claims an investment deduction usually reads only the first half of the calculation: 50 % of the planned acquisition cost reduces profit, so EUR 150,000 on a EUR 300,000 investment. The second half is the more interesting one. The business in which the deduction arises has no revenue yet in its first year; the deduction turns it into a loss-making business. Whether and how that loss relieves your other income is governed by three stages of the German Income Tax Act, and at each of them part of the effect can be lost. This article walks through the stages in the order the tax office applies them, recalculates what a deduction is worth on the 2026 tariff, and shows why an oversized deduction in the wrong year costs money instead of saving it.

Why does the investment deduction create a loss at all?

Because the deduction reduces the profit of a business that earns nothing yet in the year of the deduction. The investment deduction under §7g EStG allows up to 50 % of the expected acquisition cost of a movable asset to be deducted from profit before the asset is acquired, capped at EUR 200,000 per business. In an energy direct investment, that business is your own investment business, which will later operate the solar park or battery storage system. In the year of the deduction the plant does not exist yet, so there is no electricity revenue for the deduction to run against. The result of the business is the deduction itself, with a negative sign: negative trade income of up to EUR 150,000 on a EUR 300,000 investment.

In the year of acquisition the pattern repeats. Under §7g Abs. 2 EStG the deduction is added back to profit and, in the same step, subtracted from the acquisition cost, so the two cancel out and the depreciation base halves. On that reduced base come the special depreciation under §7g Abs. 5 EStG of up to 40 % and the declining-balance depreciation under §7 Abs. 2 EStG, EUR 82,500 together in the example, while the first electricity revenue often covers only part of the year. How the three instruments interlock is explained in The Investitionsabzugsbetrag explained simply: how the IAB works; the comparison of depreciation methods is drawn in Sonder-AfA §7g (5) vs. declining-balance AfA §7 (2): which combination, when?. This article is about one question only: what happens to the result, a loss that arises by design and meets your other income in the income tax return.

Can I offset the loss against my salary or practice profit?

Yes, in the same year and without any cap on the amount. German income tax is not levied per category of income but on the sum of all income; that is what §2 Abs. 3 EStG provides. Negative trade income is netted against positive income from employment, from a professional practice, from letting or from another trade; the statute calls this Verlustausgleich, loss offsetting. There has been no cap on the amount of this offset since 2004. A loss of EUR 150,000 from the investment business therefore meets a salary of EUR 250,000 in full, and EUR 100,000 is taxed.

Three restrictions come with this, and all three concern the nature of the loss rather than its size. First, the business must be a business: without an intention to make a profit, the tax office recognises neither the business nor its loss. Second, §15b EStG blocks losses from a tax deferral scheme from being offset against other income; they may then only be set against later profits from the same source. This covers pre-packaged concepts in which the losses of the start-up phase exceed 10 % of the capital invested, which a direct investment with an IAB arithmetically usually does; the decisive question is therefore whether a pre-packaged concept exists or an investment you shaped yourself. Both tests are covered in depth in Liebhaberei and profit intention: when the tax office cancels the tax lever. Third, the offset applies to income tax; for trade tax the loss runs in its own separate circuit, more on that below.

For employees the relief arrives with the tax assessment, as a refund of the wage tax already withheld, or on application during the year via an allowance in the wage tax deduction under §39a EStG; for the self-employed and professionals it arrives via reduced prepayments. The route for employees is described in Saving tax as a high-earning employee: the §7g lever alongside your salary; where the loss goes in the return is shown in The IAB in your German tax return: where and how to actually claim it.

What happens if the loss is larger than my income?

Then a remainder is left, which the statute first carries back and then forward. If the loss of the investment business exceeds the positive income of the year, the Gesamtbetrag der Einkünfte, the total amount of income, is negative; the tax for the year is zero, and the part not offset goes into the loss deduction under §10d EStG. That runs in two stages.

Stage one is the loss carry-back, the Verlustrücktrag. The unoffset loss is deducted ex officio from the total income of the previous year, up to EUR 1,000,000, or EUR 2,000,000 for jointly assessed spouses. If the previous year is not enough, the remainder goes into the year before that; since the 2022 assessment period the carry-back covers two years. A previous year's assessment that is already final is amended for this purpose, and the overpaid tax is refunded. The carry-back can be waived, but only in full: since 2022 there has been no option to carry back only part of the loss and keep the rest (§10d Abs. 1 Satz 6 EStG).

Stage two is the loss carry-forward, the Verlustvortrag. Whatever remains after the carry-back, or was not carried back because of a waiver, is separately determined by the tax office at year end and deducted in the following years until it is used up. Here too there is a limit, the so-called minimum taxation: up to a total income of EUR 1,000,000 (spouses EUR 2,000,000) the carry-forward is deducted without restriction, beyond that only up to 70 % of the excess. That rate applies to the 2024 to 2027 assessment periods; from 2028 it reverts to 60 % under the Wachstumschancengesetz. For the magnitudes of a direct investment this limit is theoretical: anyone bringing a EUR 200,000 carry-forward into a year with EUR 300,000 of income deducts it in full.

A third rule sits in both stages and is frequently overlooked: carry-back and carry-forward are deducted “with priority over special expenses, extraordinary burdens and other deductible amounts”. The loss therefore pushes in ahead of your pension and insurance contributions, your donations and your basic allowance. Whatever can then no longer be deducted in a year without taxable income is forfeited: special expenses cannot be shifted into another year, and the basic allowance is available only once per year. This is where the part of the calculation begins that lives in the tariff rather than in §10d.

Loss carry-back or loss carry-forward: which is better?

Usually the carry-back, but not always. Two things speak for the carry-back. First, time: the refund for the previous year arrives with the assessment for the loss year, whereas the carry-forward takes effect a year later at the earliest, and only if there is income then. Second, the tariff: for most investors who use an IAB, the previous year was a high-income year, so the loss carried back works there at 42 % or 45 % plus solidarity surcharge. Interest is not something the carry-back brings, though: under §233a Abs. 2a AO the interest period for a refund arising from a loss carry-back starts only 15 months after the end of the loss year, the same point as for the tax of the loss year itself.

One case speaks for waiving the carry-back and thus for the carry-forward: when the coming year will foreseeably bring higher income than the previous year, for instance through the sale of a practice, a severance payment, a special distribution or the sale of a business. The same loss is then worth more in the following year than in the previous one; how strongly such a one-off year pushes the tariff upwards is shown in Selling a practice or business: optimising the tax and reinvesting the proceeds sensibly and Investing a severance payment tax-efficiently: the fifth rule, the IAB and the energy investment. The waiver also pays if the previous year was a low-income year, for instance because of parental leave, a sabbatical or a start-up phase. Because the waiver is only possible in full, the decision belongs before the return for the loss year is filed, not after.

Why is an oversized loss a waste?

Because a deduction is worth only as much as the tax that would have fallen on those euros without it, and that falls the deeper the deduction reaches into the tariff. The common shorthand “deduction times top tax rate” holds only as long as taxable income after the deduction still sits in the upper proportional zone. The 2026 income tax tariff under §32a EStG starts above the basic allowance of EUR 12,348 at 14 %, reaches 42 % at EUR 69,878 and 45 % from EUR 277,826. A deduction that takes income from EUR 250,000 to EUR 100,000 saves around 44 % on every euro including solidarity surcharge. A deduction that takes it from EUR 120,000 to zero saves on average only around 24 % on the last EUR 60,000, and nothing on the last EUR 12,348.

What this means in practice is shown by two cases of our own on the 2026 tariff, each with single assessment. The first is the reference case from our other articles: EUR 250,000 of taxable income, EUR 300,000 invested in a solar park.

The second case is the one this article warns about: a weaker year, a larger investment and the full IAB.

The difference is not a rounding effect. In the first case, EUR 200,000 of deduction becomes EUR 68,614 of saving. In the second, the same EUR 200,000 spread over four years at EUR 50,000 each would bring around EUR 92,600: almost EUR 24,000 of difference, caused solely by the full deduction pushing income down through the progression zone, through the special expenses and through the basic allowance into negative territory. The loss carry-back rescues only the part that meets high income again in the previous year; it does not rescue the EUR 20,000 of special expenses or the basic allowance of the loss year.

Against this stands an argument that does not appear in the calculation: liquidity. The full IAB brings the refund into the year before acquisition, which is when the equity is needed; the dosed variant stretches it over years in which income may also turn out lower than assumed. Which side prevails depends on the financing of the specific project, and that is a question for tax adviser and bank together, not for a rule of thumb. What the equity actually amounts to after the tax effect is calculated in How much equity is actually required?.

How do I dose the IAB, special depreciation and declining-balance depreciation over the years?

With the options that all three instruments come with. None of them is an all-or-nothing amount.

• The investment deduction may be “up to 50 percent” of the expected acquisition cost (§7g Abs. 1 EStG). A lower rate is permitted; the EUR 200,000 cap per business applies to the sum of the deductions of the year and the three preceding years. Anyone spreading the investment over two years or investing in two projects can stagger the deduction accordingly; what that looks like over several years is shown in Using the investment deduction every year: building a portfolio over multiple years.
• The special depreciation of up to 40 % in total can be taken in the year of acquisition and the four following years in any distribution (§7g Abs. 5 EStG). It is the most flexible of the three instruments: in a high-income year a lot is depreciated, in a weak year nothing.
• Declining-balance depreciation under §7 Abs. 2 EStG is available for acquisitions between 1 July 2025 and 31 December 2027 at three times the straight-line rate, capped at 30 %. It is a method, not a dose: once chosen, it runs on schedule; a switch to straight-line is possible, the way back is not. Anyone who deliberately wants to keep the first-year effect small chooses straight-line.
• The add-back of the IAB in the year of acquisition and the reduction of the acquisition cost (§7g Abs. 2 EStG) are options too; in practice both are exercised in the same amount so that the step stays profit-neutral.

The planning rule that follows from the tariff is simple: a deduction should, if possible, not push taxable income below the threshold at which the 42 % top rate begins, in 2026 that is EUR 69,878 for single and EUR 139,756 for joint assessment. Below that, every further euro of deduction loses value, and below special expenses and the basic allowance it loses it entirely. Where more deduction potential exists than the year can carry, the special depreciation is the instrument for shifting it into following years. The IAB itself cannot be reduced afterwards without reversing it, with the consequences described in Reversing the IAB: what happens if you don't invest, deadlines, interest, ways out; that is why the dosing belongs before the deduction is claimed, not after.

What applies to married couples, prepayments and trade tax?

Under joint assessment the loss of one spouse is offset against the income of the other, because both incomes are combined into one total. The limits of the loss carry-back and the base amount of the carry-forward double to EUR 2,000,000, and the splitting tariff doubles all tariff zones, so the 42 % rate only begins from EUR 139,756 of joint income. For dosing this means: a couple with EUR 250,000 of joint income has less room than a single person with the same amount, because the deduction leaves the upper tariff zone earlier.

Prepayments: a foreseeable loss from the investment business is a reason to have the income tax prepayments for the current year reduced under §37 Abs. 3 EStG; the application goes to the tax office without formal requirements and needs a plausible forecast, usually evidence of the planned investment. Employees achieve the same via the allowance in the wage tax deduction under §39a EStG. In both cases the relief arrives months earlier than with the assessment; and in both cases it is an advance that has to be repaid with interest if the IAB is later reversed.

Trade tax: the investment business is a trade, and its loss counts there too. But trade tax knows neither a loss carry-back nor any offset against your salary or practice profit; under §10a GewStG the trade loss is carried forward only within the same business and set against its later trade earnings. For the return this is irrelevant in most cases, as Trade tax on PV and storage direct investments: how much of it actually sticks shows; what matters is not to confuse the two circuits. The income tax loss is the one that relieves your income.

Tax audit: a negative total income with a loss carry-back is one of the triggers that make the tax office look more closely. What is then examined and which documents should be at hand is covered in Tax audits and the investment deduction amount: what the tax office actually checks; the formal requirements of the deduction itself are summarised in Investitionsabzugsbetrag: all §7g EStG requirements, and who can use it.

Checklist: eight questions for your tax adviser before the deduction

1. What is my expected taxable income in the year of the deduction, after all other items?
2. How much deduction can this year carry before income falls below the 42 % threshold, and how much before it reaches special expenses and the basic allowance?
3. Should the IAB be the full 50 % or less, and what does that mean for the equity in the year of acquisition?
4. How do we spread the special depreciation over the five years, and what income do we expect in those years?
5. If a carry-back arises: what was the income of the two previous years, and where does the loss work better, there or in the following year?
6. Is a one-off event coming up in the next few years that argues for waiving the carry-back, such as a sale, a severance payment or a distribution?
7. Do we apply for a reduction of prepayments or for a wage tax allowance, and with which document?
8. Is my investment structured so that §15b EStG does not apply, and is that documented?

How we work with this

In our financial models we never state the tax effect of a direct investment as “deduction times top tax rate”, but as the tariff difference on the specific income an investor tells us; the calculation logic is the same as in the tables above. Where a project creates more deduction than a year can carry, we show that rather than hiding it in the saving, and we pass the dosing on to the tax adviser as a question. We do not make return promises; we show which figure rests on which assumption. That is exactly what we go through with you in a no-obligation initial consultation, ideally on the basis of your latest tax assessment.