What You Need To Know About Claiming Tax Deductions

Many people confuse Deductions and Exemptions. Both items are subtracted from your gross income, but exemptions refer to Income that cannot be taxed such as local dividends, government grants, foreign dividends, etc. Deduction refers to the expense incurred in the production of Income.

Let us look at the criteria that the expenses need to meet in order to qualify for deductions. The full definition of the deduction is for the purposes of determining the taxable income derived by any person from carrying on any trade, there shall be allowed as a deduction from the income of the person so derived. expenditure and losses actually incurred in the year of assessment in the production of the income, provided such expenditure and losses are not of a capital nature

The criteria that need to be met before a deduction is claimed are the following;

1) Carrying a trade

2) Expenditure or losses

3) Actually incurred

4) Year of assessment

6) Production of income

7) Not capital in nature

All of these requirements need to be met to qualify for a deduction.

1. Carrying on a trade

Carrying on trade includes: "profession, trade, business, employment, calling, occupation, or venture, including letting property." Passive investment activities are not considered a "trade." For something to be considered a trade, it needs to be something that is done over and over again. Keeping an investment in your portfolio is not an active step. There must be some hope of making a profit, or the money paid out in the transaction must have been used only for trade, even if there was no hope of making a profit.

2. Expenditure or Losses

The Act lets people deduct both expenses (voluntary) and losses (involuntary). This does not just mean cash outflows, but also debts that could be paid off in cash at a later date. In the same way, the outflow does not have to be only cash. If a debt is paid off by exchanging an asset or service, the value of that asset or service may also be deductible.

3. Actually Incurred

The term "actually incurred" is used instead of "necessarily incurred." This is very important to remember. It means that a taxpayer can still deduct expenses that some people might think are not necessary, as long as the expenses were really paid for, and all the other requirements of the definition were met. Paid does not mean "incurred". Expenses that can be written off include both amounts paid and amounts that the taxpayer is liable for.

4. Production of Income

In a simple way production of income refers to expenses incurred to create income that is not exempt from tax if the income earned is exempt from tax the expense incurred will not qualify for a deduction

5. Not Capital In Nature

An amount can be either capital or operational (revenue) in nature.

It is important to note that there is a lot to consider before a deduction can be claimed and not all costs are deductible and not all costs can be claimed in full.

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