the tax without moving the scale by taking the difference off the top. The couple above, having receipts for $22,700 in deductions, means that the last $10,000 of their income is tax free. After seven years the papers can be destroyed; if unchallenged. Source and Method Deductions and exemptions The U.S. system allows reduction of taxable income for both business and some nonbusiness expenditures, called deductions. Businesses selling goods reduce gross income directly by the cost of goods sold. In addition, businesses may deduct most types of expenses incurred in the business. Some of these deductions are subject to limitations. For example, only 50% of the amount incurred for any meals or entertainment may be deducted. The amount and timing of deductions for business expenses is determined under the taxpayer's tax accounting method, which may differ from methods used in accounting records. Some types of business expenses are deductible over a period of years rather than when incurred. These include the cost of long lived assets such as buildings and equipment. The cost of such assets is recovered through deductions for depreciation or amortization. In addition to business expenses, individuals may reduce income by an allowance for personal exemptions and either a fixed standard deduction or itemized deductions. One personal exemption is allowed per taxpayer, and additional such deductions are allowed for each child or certain other individuals supported by the taxpayer. The standard deduction amount varies by taxpayer filing status. Itemized deductions by individuals include home mortgage interest, state and local taxes, certain other taxes, contributions to recognized charities, medical expenses in excess of 7.5% of adjusted gross income, and certain other amounts. Personal exemptions, the standard deduction, and itemized deductions are limited (phased out) above certain income levels. Business entities Corporations must pay tax on their taxable income independently of their shareholders. Shareholders are also subject to tax on dividends received from corporations. By contrast, partnerships are not subject to income tax, but their partners calculate their taxes by including their shares of partnership items. Corporations owned entirely by U.S. citizens or residents (S corporations) may elect to be treated similarly to partnerships. A limited liability company and certain other business entities may elect to be treated as corporations or as partnerships. States generally follow such characterization. Many states also allow corporations to elect S corporation status. Charitable organizations are subject to tax on business income. Certain transactions