Deduction is a process or technique of arriving at a logical conclusion by using certain pre-existing facts or evidence. It requires making inference from known facts and is commonly used in the field of law and taxation. In legal terms, deduction is the process of subtracting certain amounts or amounts of money from a total amount.
At the most basic level, deduction involves taking away something from a given figure or a number. This can be taxes, allowances, insurance premiums, health care costs, etc. Essentially, deduction is the opposite of addition. In other words, when you do a deduction, you reduce the amount of money you owe in the future.
When it comes to taxes, deduction is the reduction in tax liability by subtracting certain items from taxable income. This may include expensing a portion of businesses expenses, such as office supplies or employee meals, which reduce the amount owed. Other deductions may include those related to charitable contributions, medical costs, and home mortgage interest.
Business owners may need to understand legal terms related to deduction, such as “accrual basis” or “cash basis” when filing taxes. Under an accrual basis, taxpayers must include deductible expenses in the year they were incurred or charged, even if the business has yet to pay for the expense. Conversely, with cash basis accounting, business owners only have to deduct expenses when they’ve been paid for.
Examples of Deduction
Here are some everyday examples of deduction that businesses might use:
- Insurance premiums – insurance premiums paid by a business can be deducted from the business’ profits.
- Health care costs – medical expenses incurred by a business can be deducted from its taxable income.
- Home office expenses – certain expenses associated with establishing and running a home office, such as electricity, may be deductible.
- Charitable donations – if a business makes an eligible charitable donation, it can be deducted from the business’ taxes.
Understanding deductions is essential for businesses of all sizes. There are a wide variety of deductions available to businesses, and it may be worth consulting with a tax expert to explore which ones may be most beneficial for a particular business. By utilizing the deductions available, businesses can save a great deal of money.