Calculating Your Tax Deductions

September 30, 2010 by  Filed under: Taxes 

In general, tax deductions are only available to individuals or companies when the money spent is going towards producing possible income or benefits in the future. There are very specific guidelines that specify when reductions or cuts can be made. If there is an item that the government wants to encourage individuals or businesses to purchase, then they will often offer cuts to the tax base to encourage companies to invest in such a product. The rules and regulations over reductions differ from country to country.

The United Kingdom follows the principles drawn out by GAAP (Generally Accepted Accounting Principles). The United States allows tax deductions to all normal and justifiable expenses incurred throughout the year in executing trade or business. Of course, under this system, there are some definitions that need to be made clear in order to understand how many deductions you or your company can make. For instance, how exactly do you define business or trade? A very general response to this is that a business is a regular and continuous business arrangement that is carried out with the intention of earning a profit.

Another important clarification is the definition of “normal and justifiable” or “ordinary and necessary expenses”. Generally, if the expenses are of the type one would expect this specific business to produce in order to make a profit or advertise the company, then they are acceptable. Any extravagant or over the top expense that sticks out as an unnecessary purchase will not be considered “ordinary and necessary” and subsequently will not be approved for a deduction in your tax.

There are various specific areas where they are not permissible even if they fall under the realm of justifiable expenses incurred for a company to increase profits. The first is reductions relating to the use of automobiles, as well as reimbursement of specific employees. There are tax deduction limits on lobbying or expenses of a similar nature, as well as limits for certain entertainment expenses independent of whether or not it is related to business. Many jurisdictions allow itemized tax deductions for individuals that meet some of the following criteria: medical expenses that surpass 7% of an individual’s income, interest on home loans, a cash donation to a non-profit organization, theft of property or loss due to death, investment in a retirement plan or for health care, and specific expenditures related to educational endeavors.

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