A tax deduction is an expense or amount you subtract from gross income to arrive at taxable income, reducing the base on which tax is calculated. A deduction is not the same as a tax credit: a deduction lowers taxable income, so its cash value depends on your marginal rate, while a credit reduces the tax bill directly, pound for pound or euro for euro.
For a business, common deductions include salaries, rent, equipment depreciation, interest on business loans, and professional fees. If a company has 200,000 in revenue and 140,000 in deductible costs, tax applies to the remaining 60,000 of profit, not the full 200,000.
The value of a deduction scales with your bracket. A 1,000 deduction saves 200 for someone at a 20% marginal rate but 400 for someone at 40%. Rules differ by country: the US offers a standard deduction or itemising, the UK allows specific allowable expenses, and Italy, Germany, France, and Spain each define which costs are deductible for individuals and businesses.
- Deduction: reduces taxable income
- Credit: reduces the tax owed directly
See also our tax bracket and tax allowance entries.