Lesser-Known Tax Allowances Offer Savings Opportunities for the Self-Employed

As the year draws to a close, many self-employed individuals and business owners are reviewing their financial statements and seeking effective strategies to minimize their tax burdens. In a climate marked by economic uncertainty, optimizing available tax advantages is increasingly important. Among the various provisions in the Austrian income tax law, the profit allowance (Gewinnfreibetrag) stands out as a particularly valuable but underutilized tool for reducing tax liability.

The profit allowance is available to self-employed professionals, business operators, and those working in agriculture or forestry, as outlined in Section 10 of the Austrian Income Tax Act. This deduction serves as a counterpart to the tax benefits granted through the 13th and 14th monthly salaries for employees. The allowance exists in two forms: the basic allowance, which is automatically granted for profits up to a certain threshold, and the investment-based allowance, which requires qualifying investments in tangible assets or specific financial instruments.

The basic allowance applies to annual profits up to EUR33,000, allowing a deduction of 15%, which equates to a maximum reduction of EUR4,950 in taxable income. For profits exceeding this amount, the investment-based profit allowance becomes relevant. This supplementary allowance is tiered, offering diminishing percentages as profits rise: 13% up to EUR175,000, 7% up to EUR350,000, and 4.5% up to EUR580,000. In total, the maximum deduction can reach EUR46,400, depending on the level of profit and the scale of qualifying investments.

To claim the investment-based allowance, eligible investments must be made in either qualifying business assets with a useful life of at least four years (excluding passenger vehicles) or in designated securities. Among the most popular options are specific investment funds, often referred to as Section 14 funds, which are designed for tax-efficient investing. In addition to reducing taxable income, these funds offer the potential for capital appreciation, making them a dual-purpose financial planning tool.

Despite its advantages, awareness and utilization of the investment-based profit allowance remain limited among business owners. Recent surveys indicate that a significant proportion of self-employed professionals are unaware of the tax benefits associated with Section 14 funds, and only a minority have taken steps to leverage this opportunity.

Changes to the profit allowance have recently enhanced its attractiveness. The percentage for the basic allowance was increased from 13% to 15% beginning with the 2024 tax year, and future government plans may see the threshold for the basic allowance rise to EUR55,000 in the coming years. To benefit from the profit allowance for the current year, qualifying investments must be completed and recorded by the end of the year.

Numerous financial institutions and advisors provide tools to help calculate potential tax savings. The Austrian Ministry of Finance offers an online profit allowance calculator, while banks and investment firms maintain lists of approved funds and products. More than 100 investment funds--spanning real estate, government bonds, and mixed equity-bond portfolios--are eligible, and most major banks offer tailored solutions. Additionally, Austrian government bonds (Bundesschatzscheine) present an alternative, providing fixed interest rates and a high level of security, with green options available for environmentally conscious investors.

For those considering investing in qualifying securities, it is essential to understand the requirements: investments must be maintained for at least four years and must be properly designated in the company's financial records as related to the profit allowance. Failure to comply can result in the loss of tax benefits during an audit.

Overall, the profit allowance system offers a significant opportunity for self-employed individuals and business owners to reduce their tax liabilities while simultaneously investing in their business's growth or building long-term capital. As the deadline for annual tax planning approaches, reviewing the eligibility and requirements for this allowance could yield substantial financial benefits.