What is a Tax Deduction?

IRS rules state that a business expenditure is deductible if it is an "ordinary and necessary" expenditure required for the conduct your business.

Deductions are business expenses that are subtracted from business gross revenue. The difference is either a net profit or net loss.

Net profit is subject to income taxes. If you're self-employed, a net business loss is classified as an ordinary loss, which is fully deductible against any other items of income reported on your personal tax return, such as interest income, wages from a job, including a spouse's wages.

The value of each deduction depends on your tax bracket. For example, if you're in the 25% tax bracket a $1,000 deduction will slash your tax liability by $250 (25% x $1,000).

Check out IRS Publication 535 - Business Expenses

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