The Investitionsabzugsbetrag explained simply: how the IAB works

The Investitionsabzugsbetrag, IAB for short, is a provision of German income tax law (§7g EStG). It allows businesses to deduct up to 50 % of the cost of a planned investment from taxable profit before a single euro has been spent. The tax saving arrives first, the expense later; part of the investment is paid out of money that would otherwise have gone to the tax office. This article explains the mechanics from scratch, for readers without any tax background.

If you already know the basics, skip ahead: IAB under §7g EStG: example calculation for battery storage works through a complete €300,000 example, Investitionsabzugsbetrag: all §7g EStG requirements, and who can use it covers all requirements in detail, and Legally reducing your tax: the most effective strategies ranks the IAB against the other legal tax levers.

What is an Investitionsabzugsbetrag?

The Investitionsabzugsbetrag is an up-front tax deduction for a planned investment: up to 50 % of the expected acquisition costs may be deducted from profit before the purchase, capped at €200,000 per business. To see why that is remarkable, it helps to look at the normal rule of tax law first.

Normally, a business that buys a machine, a vehicle or a technical installation cannot deduct the cost in the year of purchase. It deducts the cost spread over the years of use, one slice per year. This spreading is called depreciation, in German tax law „Absetzung für Abnutzung“, AfA for short. An asset with a ten-year useful life is deducted over ten years. The IAB breaks this principle in the opposite direction: it pulls half of the deduction forward in time, into a year in which the investment is still only planned.

Why does the IAB exist?

As a liquidity aid for small and mid-sized businesses. The legislator wants to make investing easier: today's tax saving helps pay for tomorrow's purchase. Without the IAB, a business would have to pre-finance the full purchase price and would recover the tax relief only gradually through depreciation. With the IAB, a substantial part of the relief arrives before the invoice is paid. The €200,000 profit cap exists for the same reason: the provision is aimed at smaller businesses, not corporations.

How does the IAB work, step by step?

The mechanics consist of four steps spread over several years:

1. Form the deduction (year 0): You plan to acquire a business asset, say a machine or an energy installation, within the next three financial years. For that plan you deduct up to 50 % of the expected costs from profit. Tax jargon calls this „forming“ the IAB; in practice it is an entry in the tax return, not an application and not a permit.
2. Invest (years 1 to 3): You actually buy the asset. You have three financial years after the year of forming to do so.
3. Add back and reduce (year of purchase): The deducted amount is added back to profit and, in return, subtracted from the acquisition costs. Taken by itself this step is tax-neutral; its effect is that future depreciation runs on a correspondingly smaller base.
4. Depreciate (from the year of purchase): Normal depreciation runs on the remaining acquisition costs, supplemented by special depreciation where available. More on that below.

The tax advantage therefore arises in the year of forming, and the following years slowly even it out through the smaller depreciation base. Which deadlines sit in the calendar along the way, from the right tax year for forming to the end of the investment window, is sorted out in Forming the IAB now: which tax deadlines and time windows count in 2026/2027.

A simple worked example

Suppose you plan an investment of €100,000 for next year, and your income sits in the top marginal bracket of 44.3 % (42 % income tax plus solidarity surcharge). You form an IAB of €50,000 in the current year and pay €22,150 less tax. In the year of purchase the IAB is resolved: €50,000 is added back to profit, and at the same time the depreciable acquisition costs drop from €100,000 to €50,000. Those €50,000 are then depreciated normally over the useful life.

In practice the calculation rarely stays this simple, because two further levers join in the year of purchase: the special depreciation under §7g Abs. 5 EStG and declining-balance depreciation. Together they mean that in an energy direct participation, a large share of the investment volume takes tax effect in year one. The complete calculation with all three levers is shown in IAB under §7g EStG: example calculation for battery storage; what that means for the equity actually tied up is worked out in How much equity is actually required?.

Is the IAB a real saving or just a tax deferral?

At its core it is a deferral, with two real advantages. First the honest half: the IAB does not enlarge the depreciation volume. In total, exactly the actual acquisition costs are deducted, not a euro more; the IAB merely shifts part of that deduction forward. What is saved in the year of forming is missing as depreciation in the years after.

Two effects are real nonetheless. First, liquidity: you have the money years earlier, advanced interest-free by the state, and can put it to work, typically in the investment itself. Second, the progression effect: if your tax rate in the year of forming is higher than in the years after, the shift becomes a permanent saving. That is exactly why the IAB is particularly effective in years with income spikes, for instance a severance payment or a business sale; Investing a severance payment tax-efficiently: the fifth rule, the IAB and the energy investment and Selling a practice or business: optimising the tax and reinvesting the proceeds sensibly cover these situations in detail.

Who can use the IAB?

Any business with trading-type income whose profit in the year of forming does not exceed €200,000. That covers tradespeople, the self-employed and freelancers as well as farmers and foresters; legal forms range from the sole proprietorship through GbR and GmbH & Co. KG to the GmbH. Only depreciable, movable fixed assets qualify, meaning machines, vehicles or technical installations; buildings, securities and software do not.

And as an employee? Not directly, because salary does not count as trading-type income. But the access can be created structurally: by founding a small business of your own that acquires and operates the asset, or through an entrepreneurial participation, for instance in an energy installation. Both routes, the profit cap in detail and the latest federal fiscal court rulings are covered in Investitionsabzugsbetrag: all §7g EStG requirements, and who can use it. Important in every case: the business must genuinely aim at profit, otherwise the tax office will not recognise it; the criteria are explained in Liebhaberei and profit intention: when the tax office cancels the tax lever.

What happens if I never invest?

Then the IAB is cancelled retroactively. If the purchase has not happened by the end of the third financial year after forming, the tax office amends the original assessment, the saved tax must be repaid, and the repayment bears interest at 0.15 % per month, i.e. 1.8 % per year, starting 15 months after the end of the forming year. The IAB is therefore not a tool for „save tax first, decide later“; it presupposes a serious, documented intention to invest. What the reversal costs in detail and which ways out exist is shown in Reversing the IAB: what happens if you don't invest, deadlines, interest, ways out.

How do the IAB, special depreciation and regular depreciation interact?

The IAB is the first of three levers that can be stacked on one investment. After the purchase, the special depreciation under §7g Abs. 5 EStG allows an additional deduction of up to 40 % of the acquisition costs (reduced by the IAB), at your option entirely in the first year. In parallel runs regular depreciation, for acquisitions until the end of 2027 optionally declining-balance at up to 30 % per year. Combined, well over half of the investment can take tax effect in year one. Which combination makes sense when is compared in Sonder-AfA §7g (5) vs. declining-balance AfA §7 (2): which combination, when?; and because a new IAB can be formed every year, the effect can be repeated over several years, as Using the investment deduction every year: building a portfolio over multiple years shows.

Five common misconceptions

• “The IAB is a subsidy.” No. The state gives nothing away, it shifts the tax burden in time. The advantage lies in liquidity and the progression effect, not in gifted money.
• “With the IAB I deduct more than the acquisition costs.” No. In total, exactly the actual costs are deducted; the IAB changes the when, not the how much.
• “The IAB is only for large companies.” Rather the opposite: the €200,000 profit cap excludes large businesses. The provision targets small businesses, including newly founded ones.
• “The IAB also works for shares, ETFs or property.” No. Only depreciable, movable fixed assets qualify, such as machines or energy installations.
• “The IAB is applied automatically.” No. It has to be claimed in the tax return and filed electronically; where exactly is shown in The IAB in your German tax return: where and how to actually claim it.

Whether an energy direct participation with an IAB fits your income and tax situation is something we clarify in a no-obligation initial consultation, together with your tax advisor if you wish. We make no return promises in the process.