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What Does Tax Deductible Really Mean?

I hope I’m not the first one to break this news – I try to avoid p*ss*ng in people’s cornflakes if I can – but it’s important to understand that “tax deductible” doesn’t mean “free.” It doesn’t mean the government pays you dollar for dollar for any business expense your heart desires.

What each expense DOES do is lower your tax liability.⁠

The money you owe (or will get refunded) will depend on your tax bracket. And your tax bracket will depend on the total gross profit of your business, plus any additional income you bring in (such as through your W2 job), plus your spouse’s income, if you are filing with one.

Super Simple Example

Say you made $50,000 gross income this year, and you spent $1,000 on, say… a super awesome bookkeeper. 🙂

You don’t get $1,000 back from Uncle Sam – he’s not in the habit of paying for every expense you take on. BUT, it means the taxable income for your business is now $49,000 instead of $50,000.

I can’t do an exact calculation of your tax bracket, because, as I said above, it depends on factors like any W-2 or other business income, dependents you can deduct, etc. But to keep things simple, let’s say all the income for your and your spouse lands you in the 25% tax bracket.

That would mean you are taxed 25% of $49k  (owing $12,250) instead of $50k (owing $12,500). So it’s not $1000, (dollar for dollar) but it’s still $250 that you don’t have to pay.

That’s enough for a spa day – or at least a spa HALF day!⁠