How Much Can I Deduct?

You cannot deduct more for a business expense than the amount you actually spend. There is usually no other limit on how much you can deduct if the amount is reasonable. However, if your deductions are large enough to produce a net business loss for the year, the tax loss may be limited.

Recovery of amount deducted. If you recover part of an expense in the same tax year for which you would have claimed a deduction, reduce your expense deduction by the amount of the recovery. If you have a recovery in a later year, include the recovered amount in income. However, if part of the deduction for the expense did not reduce your tax, you do not have to include all the recovery in income. Exclude the part that did not reduce your tax.

For more information on recoveries and the tax benefit rule, see Publication 525.

Payments in kind. If you provide services to pay a business expense, the amount you can deduct is the amount you spend to provide the services. It is not what you would have paid in cash.

Similarly, if you pay a business expense in goods or other property, you can deduct only the amount the property costs you. If these costs are included in the cost of goods sold, do not deduct them as a business expense.

Limits on losses. If your deductions for an investment or business activity are more than the income it brings in, you have a net loss. There may be limits on how much, if any, of the loss you can use to offset income from other sources.

Not-for-profit limits. If you do not carry on your business activity with the intention of making a profit, you cannot use a loss from it to offset other income. See Not-for-Profit Activities, later.

At-risk limits. Generally, a deductible loss from a trade or business or other income-producing activity is limited to the investment you have "at risk" in the activity. You are "at risk" in any activity for the following items.

1. The money and adjusted basis of property you contribute to the activity.
2. Amounts you borrow for use in the activity if:
1. You are personally liable for repayment, or
2. You pledge property (other than property used in the activity) as security for the loan.

For more information, see Publication 925.

Passive activities. Generally, you are in a passive activity if you have a trade or business activity in which you do not materially participate during the year, or a rental activity. In general, deductions for losses from passive activities only offset your income from passive activities. You cannot use any excess deductions to offset your other income. In addition, passive activity credits can only offset the tax on net passive income. Any excess loss or credits are carried over to later years. For more information, see Publication 925.

Net operating loss. If your deductions are more than your income for the year, you may have a "net operating loss." You can use a net operating loss to lower your taxes in other years. See Publication 536 for more information. See Publication 542 for information about net operating losses of corporations.

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