Tax Deduction
An expense that reduces taxable income.
A tax deduction lowers the amount of income subject to taxation. Deductions can be above-the-line (reducing AGI, available to all filers) or below-the-line (itemized or standard). Common business deductions include rent, salaries, supplies, insurance, and depreciation. The tax savings from a deduction equals the deduction amount multiplied by your marginal tax rate.
Example
A small business deducts $24,000 in office rent—in the 24% tax bracket, this saves $5,760 in federal income taxes.
Why It Matters for Your Business
Every legitimate deduction directly lowers your tax bill, so knowing which expenses qualify helps you keep more of what you earn.
Practical Tips
- •Track all business expenses throughout the year rather than scrambling at tax time.
- •Consult a tax professional about industry-specific deductions you might be missing.
Related Terms
More Taxes Terms
Adjusted Gross Income
Gross income minus specific deductions like retirement contributions.
Tax Audit
An examination of tax returns by the IRS to verify accuracy.
Capital Gains
Profit from selling an asset for more than its purchase price.
Capital Loss
Loss from selling an asset for less than its purchase price.
Estimated Taxes
Quarterly tax payments made by self-employed individuals and businesses.
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