What is a tax deduction?
A tax deduction reduces taxable income, not the tax itself. The saving equals the deduction multiplied by the tax rate. This differs from a tax credit, which reduces the tax bill directly.
Example
A business with $100,000 taxable profit and a 25% tax rate pays $25,000. A $10,000 deductible expense reduces taxable profit to $90,000 and tax to $22,500, a saving of $2,500. A $2,500 tax credit would give the same saving directly.
Common business deductions
- Rent, utilities and office costs
- Salaries, wages and employer pension contributions
- Cost of goods sold
- Advertising and marketing
- Professional fees
- Business travel
- Interest on business loans
- Depreciation or capital allowances on equipment
- Bad debts written off
What usually isn't deductible
- Fines and penalties
- Personal or private expenses
- Most entertainment (depending on country)
- Income tax itself
- [Dividends](/glossary/dividend) paid to shareholders
Tips
- Keep receipts and records for every claim.
- Separate business and personal spending.
- Check local rules, because deductibility varies between countries.
See also [business expenses](/glossary/business-expenses).