How does the German Investitionsabzugsbetrag (IAB) work to reduce business tax?

The Investitionsabzugsbetrag is one of Germany's most powerful SME tax planning tools. Unlike straightforward depreciation (AfA), which only creates deductions after the asset is purchased, the IAB creates a deduction before the asset exists — shifting taxable income between years and generating a real cashflow benefit.\n\nHow the IAB works: step by step\n\nYear 1 (claim year): The business plans to buy an asset costing €200,000 (net) within the next 3 years. It claims a €100,000 IAB deduction (50% of €200,000) in its current year tax return. This reduces Year 1 taxable profit by €100,000.\nAt a combined KSt + GewSt rate of 30%, this saves approximately €30,000 in tax that would otherwise have been due in Year 1 (payable in Year 2).\n\nYear 2 or 3 (acquisition year): The asset is purchased for €200,000. In the acquisition year:\n- The €100,000 IAB is reversed (added back to taxable income): +€100,000 to profit\n- The asset's cost basis is reduced by €100,000: the asset is recorded at €100,000 in the Steuerbilanz (not €200,000)\n- The reduced-basis asset is then depreciated under normal AfA over its useful life\n- Additionally, a Sonderabschreibung of up to 40% of the reduced cost basis (40% × €100,000 = €40,000) can be claimed in the acquisition year\n\nThe net effect: the normal depreciation in later years is reduced (because the cost basis was reduced), but the IAB deduction + Sonderabschreibung in years 1 and 2/3 together exceed what normal depreciation would have given. The key benefit is timing — the deduction comes earlier, deferring tax payment and improving cashflow.\n\nSize test: who can use the IAB?\nThe IAB is restricted to smaller businesses under §7g Abs. 1 EStG:\n- For companies preparing a Bilanz (balance sheet): the Betriebsvermögen (net business assets in the tax balance sheet) at the end of the year must not exceed €235,000\n- For businesses using the Einnahmen-Überschuss-Rechnung (EÜR/cash basis): profit must not exceed €200,000 in the year of claim\nThese caps mean the IAB is intended for SMEs. Once a business grows beyond these size limits, it cannot claim new IABs, though existing claims from prior years continue.\n\nThe 3-year acquisition requirement\nThe asset must be purchased within 3 years of the claim. For a 2025 IAB, the deadline is 31 December 2028. If the asset is not purchased by then:\n- The IAB is reversed in the original claim year (2025) — amended assessment\n- Interest (§233a AO) accrues from the 15th month after the claim year (i.e., from approximately April 2027 for a 2025 claim)\n- Current interest rate: 1.8% per year (post-Constitutional Court ruling — previously 6% which was found unconstitutional)\n\nIAB for electric vehicles\nThe IAB can be used for planned electric vehicle purchases, which also benefit from the 0.25% monthly benefit-in-kind rate. A GmbH planning to buy a €50,000 BEV can claim a €25,000 IAB deduction in the year before purchase, deferring KSt + GewSt on that amount.\n\nMultiple IABs\nA business can claim multiple IABs in the same year for different planned assets, subject to the aggregate cap of €200,000 in total deductions per year. Separate IABs for machines, vehicles, and equipment can stack up to the cap.\n\nInteraction with AfA and Sonderabschreibung\nAfter applying the IAB reduction to the asset's cost basis, the first-year Sonderabschreibung under §7g Abs. 5 EStG allows up to 40% of the reduced cost basis. Combined with normal first-year AfA, a business can deduct 50-70% of an asset's original cost in the acquisition year alone — a very aggressive front-loading of tax relief.\n\nPractical example at full scale\nA GmbH plans to buy a €400,000 CNC machine (within 3 years). It claims the maximum €200,000 IAB in 2025, saving approximately €60,000 in KSt + GewSt (30% combined rate). In 2027, the machine is bought. The IAB reversal is +€200,000 to 2027 income, but the asset is carried at €200,000 in the Steuerbilanz and a 40% Sonderabschreibung of €80,000 plus first-year standard AfA of ~€20,000 = €100,000 of 2027 deductions, netting the reversal effect significantly. The overall result is approximately 2-3 years of tax deferral on €200,000.