Glossary
Deduction: meaning, deduction vs credit, and a worked example
A tax deduction is an amount you subtract from your income so you don't pay tax on it. See how it differs from a credit, the ordinary and necessary rule for business expenses, and a worked Schedule C example with 2026 IRS rates.
Prepared by Aldro Accounting · Updated · Sources checked
The quick answer
The IRS defines a deduction as an amount you subtract from your income when you file so you don't pay tax on it. A credit is different: it is subtracted from the tax you owe. A business expense is deductible when it is both ordinary (common and accepted in your industry) and necessary (helpful and appropriate for your business).
What a deduction means
A deduction lowers your income, which can lower your tax payment or increase your refund.
Individuals either take the standard deduction, a set amount based on filing status, or itemize when their deductions add up to more. For 2025 the standard deduction is $15,750 for single filers and $31,500 for married couples filing jointly. Business use of a car or home can be deducted either way.
Business owners deduct expenses on Schedule C and can deduct the employer-equivalent portion of self-employment tax when figuring adjusted gross income. Eligible owners of sole proprietorships, partnerships and S corporations can also deduct up to 20% of qualified business income on Form 8995.
Aldro's team claims these deductions on your business return as part of one flat yearly price that covers everything tax.
Worked example
A sole proprietor has $60,000 of business income in 2026. She drives 4,000 business miles: at the 2026 standard mileage rate of 72.5 cents a mile, that is a $2,900 deduction. She uses a 200-square-foot room only for business: at the simplified rate of $5 a square foot, that is $1,000. Net profit on Schedule C: $60,000 − $2,900 − $1,000 = $56,100. Her business profit for tax purposes starts at $56,100, not $60,000. A $1,000 credit would instead cut the tax bill itself by $1,000.
Common questions
What is the difference between a deduction and a credit?
A deduction is subtracted from your income before tax is figured. A credit is subtracted from the tax you owe.
What makes a business expense deductible?
It must be ordinary, meaning common and accepted in your industry, and necessary, meaning helpful and appropriate for your business. It doesn't have to be indispensable.
The cheapest way to get your business taxes done: $399 flat.
Business tax filing is $399 USD a year, and it covers everything tax for that year.
How it works
- Tell us about your business. A two-minute form. No payment is collected through it.
- Get your next steps by email. We’ll email you the next steps within one business day. After you sign up we’ll send you a secure upload link for your documents.
- We file it. Our team prepares and files your return. Add bookkeeping for $20 a month if you want it.
What's included
$399 a year covers everything tax for that tax year.
- Every business return for the year. All the federal and state or provincial business returns you need for the tax year: Schedule C, 1065, 1120-S, 1120 and their state returns in the US; T2, or T1 with T2125, in Canada.
- More than one state. Multi-state returns are included at the same price.
- Your personal return. The owner’s personal return (1040 or T1) is included when it’s needed for the business income.
- Quebec. Quebec returns (CO-17, TP-1 and TP-80) are included. Our Quebec pages are in French, and our team works with you in English.
- Extensions and reminders. Extensions (Form 7004 or 4868) and quarterly estimate reminders are included.
- Information returns. 1099-NEC, T4/T4A and T5018 slips are included in the tax price.
- City and excise returns. City and local business tax returns, and state excise returns such as Washington B&O, are included in the yearly price.
- Franchise tax reports. State franchise tax reports, such as the Texas franchise tax report, are included.
- Estimated tax and instalment amounts. We work out your quarterly estimated tax payments in the US, or your CRA instalments in Canada, and tell you what to pay and when.
- Unfiled past years. Each unfiled prior-year return is $399 per tax year, the same flat price.
- Bookkeeping at $20 a month. Unlimited bank and card accounts, monthly reconciliation and monthly statements.
Basic inventory tracking for online stores, such as Shopify, is included. Full cost-of-goods reconciliation is quoted separately. Payroll processing and sales-tax filing aren’t included in bookkeeping. Prices are in USD. Our team prepares and files your return.
Sources
- IRS: Credits and deductions for businesses · checked October 31, 2026
- IRS: Ordinary and necessary expenses · checked October 31, 2026
- IRS: Credits and deductions for individuals · checked October 31, 2026
- IRS: Self-employment tax · checked October 31, 2026
- IRS: Qualified business income deduction · checked October 31, 2026
- IRS: 2026 standard mileage rate · checked October 31, 2026
- IRS: How small business owners can deduct their home office · checked October 31, 2026
This guide explains general rules from the sources listed. It isn’t tax advice for your situation.