Small Business Tax Dictionary
Tax Deduction
A tax deduction is an expense that reduces your taxable income — the income on which you are assessed for tax. By claiming legitimate deductions, you lower your taxable income and therefore the amount of tax you owe.
How tax deductions work
If your business earns $100,000 and you have $20,000 in allowable deductions, you are only taxed on $80,000. The actual tax saving depends on your marginal tax rate — for example, at a 30% rate, a $20,000 deduction saves $6,000 in tax.
Common tax deductions for small businesses
- Home office expenses — a portion of rent, mortgage interest, utilities, and insurance
- Vehicle costs — fuel, maintenance, and depreciation on vehicles used for business
- Equipment and technology — computers, phones, and office equipment (may be depreciated over time)
- Professional services — accounting, legal, and consulting fees
- Insurance — business insurance premiums
- Business travel — flights, accommodation, and meals while travelling for work
- Training and education — courses and professional development directly related to your business
What makes an expense deductible?
To be deductible, an expense must generally be:
- Incurred in earning income — there must be a direct connection between the expense and your business income
- Not of a capital nature — one-off large purchases may need to be depreciated rather than deducted in full
- Able to be substantiated — you must have records (receipts, invoices, bank statements) to support the claim