A tax deduction is an amount subtracted from taxable income, often because of qualifying expenses. For example, a system may allow a deduction for interest paid on a student loan, subject to its rules.
The distinction matters because reducing taxable income and reducing the tax bill are different steps in the calculation.
The terms above the line and below the line refer to where an item falls in relation to adjusted gross income (AGI). In the U.S. tax form discussed in the source material, AGI was reported on line 37 of the 2017 Form 1040.
All flashcards
Tax deduction
An eligible amount subtracted from taxable income under applicable tax rules.
Cost of goods sold (COGS)
Costs associated with products a business sells, such as materials and direct labor.
Accounting method
A method that determines when income or expenses are recognized for tax purposes.
Depreciation and amortization
In the terminology described, cost recovery for tangible assets and intangible assets, respectively.
Group relief
A tax arrangement that may let commonly controlled companies use certain losses or expenses across the group.
Quiz questions
Why might a business capitalize equipment expected to provide benefits over several years?Answer: Tax rules may require the cost to be recovered over time or upon a later event.
If a product's cost is included in a business's cost of goods sold, how should the business avoid double counting it?Answer: Do not claim that cost again as a separate business expense.
What does a business accounting method determine for tax purposes?Answer: When income or expenses are recognized.
In the terminology described, which pairing correctly identifies cost recovery for tangible and intangible assets?Answer: Depreciation for tangible assets; amortization for intangible assets.
What may group relief allow commonly controlled companies to do?Answer: Use certain losses or expenses across the group, subject to local rules.
Based on the Wikipedia article Tax deduction, licensed CC BY-SA 4.0. Adapted into a summary, flashcards and quizzes.