Do you remember primary school mathematics lessons on subtraction? Well, deductions are basically just that, subtractions! If you’re working on your company’s accounts, you would subtract business expenses or losses from your gross revenue to arrive at your taxable income. If you are working on your tax return, you would subtract the percentage or amount legally permitted as a taxpayer from your adjusted gross income to reveal your taxable income.
For example…
If you wanted to understand what your gross income for your college-aged son’s tutoring business was this summer, you would add up the costs of purchasing any stationary or equipment, the rent at the host location and then subtract this from the income he received from his students. This is his gross revenue. When you go to calculate his tax return, you would subtract the amount he is legally allowed to deduct from his adjusted gross income. This could be a fixed amount or include deductions he’s legally permitted to make to arrive at his taxable income.
