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Publication 535

How Much Can I Deduct?(p4)

Generally, you can deduct the full amount of a business expense if it meets the criteria of ordinary and necessary and it is not a capital expense.

Recovery of amount deducted (tax benefit rule).(p4)

If you recover part of an expense in the same tax year in which you would have claimed a deduction, reduce your current year expense by the amount of the recovery. If you have a recovery in a later year, include the recovered amount in income in that year. However, if part of the deduction for the expense did not reduce your tax, you do not have to include that part of the recovered amount in income.
For more information on recoveries and the tax benefit rule, see Publication 525.

Payments in kind.(p4)

If you provide services to pay a business expense, the amount you can deduct is limited to your out-of-pocket costs. You cannot deduct the cost of your own labor.
Similarly, if you pay a business expense in goods or other property, you can deduct only what the property costs you. If these costs are included in the cost of goods sold, do not deduct them again as a business expense.

Limits on losses.(p4)

If your deductions for an investment or business activity are more than the income it brings in, you have a loss. There may be limits on how much of the loss you can deduct.
Not-for-profit limits.(p4)
If you carry on your business activity without 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.(p4)
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.
  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.(p4)
Generally, you are in a passive activity if you have a trade or business activity in which you do not materially participate, or a rental activity. In general, deductions for losses from passive activities only offset income from passive activities. You cannot use any excess deductions to offset 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. Suspended passive losses are fully deductible in the year you completely dispose of the activity. For more information, see Publication 925.
Net operating loss.(p5)
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.