Deductions are important to understand because they lower your tax bill from the Internal Revenue Service. However—like most things involving the United States tax code—the topic can be confusing due to the tax system’s complexity and recent legislation.
What Does Tax Deductible Mean?
According to the IRS, “deductions reduce the amount of your taxable income.”
People also commonly call deductions “write-offs” or simply “business expenses.”
There are 2 main types of deductions. There are “above-the-line” deductions, such as business expenses and interest paid on student loans. These lower your taxable income, called your adjusted gross income (AGI). “Below-the-line” deductions are taken out after your AGI is calculated.
In the latter case, you’ll either opt for a standardized deduction or itemize your deductions.
What Expenses Can I Write Off?
As a small business owner, you can deduct a massive list of expenses, including office rent, vehicle mileage, utility costs, and marketing. When considering your above-the-line deductions, think about what business expenses came out of your company’s income. Always keep detailed records and receipts. It’s best practice to research everything you want to deduct—or even better, hire a tax professional or accountant.
The Tax Cut and Jobs Act, passed in 2017, overhauled the tax system and deeply altered how taxpayers can take below-the-line deductions. The standardized deduction is now very high for most Americans—it’s likely higher for you than itemizing all your deductions. Check if your deductions qualify before making a decision.
What Are Itemized Deductions?
Itemized deductions are qualified expenses that you can deduct from your AGI, such as certain medical expenses and charitable donations. Use IRS form Schedule A to calculate these deductions and then enter their total on your Form 1040. Itemized deductions are taken out of your total income in calculating your tax bill.
The standard deduction for single filers is $12,400 as of 2020, but the figure depends on your income, filing status, and other factors. If you find that your qualifying deductions are higher than the standardized amount, you should opt for itemized deductions.