Ipso Facto Law

How Is the Deduction Calculated?

The calculation is based on two components:

1. A base deduction (25%)
2. An additional deduction (42%) on increased spending

Step 1: Calculate the Average of Prior Years

Take the values from the two previous years.

Add them together, and divide by two.

👉 The average is the sum of the prior two years, divided by two.

Step 2: Compare with the Current Year

Take the current year and subtract the average.

👉 The result is the increase.

Step 3: Apply the Deduction Rates

• 25% of the base (the average)
• 42% of the increase
• Add both amounts together

Company A Example

Company A spent:

• $100,000 in 2025
• $60,000 in 2024
• $20,000 in 2023

Average:
60,000 + 20,000 = 80,000
80,000 ÷ 2 = 40,000

Increase:
100,000 − 40,000 = 60,000

Apply deduction:

• 25% of 40,000 = 10,000
• 42% of 60,000 = 25,200

Total deduction:
10,000 + 25,200 = 35,200

Company A spent one hundred thousand dollars in two thousand twenty-five, sixty thousand dollars in two thousand twenty-four, and twenty thousand dollars in two thousand twenty-three.

To begin, we calculate the average of the prior two years—that is, two thousand twenty-three and two thousand twenty-four.

We add sixty thousand and twenty thousand, which gives us eighty thousand.
Then we divide by two.

This results in an average of forty thousand.

Next, we compare the current year, two thousand twenty-five, to that average.

Company A spent one hundred thousand in two thousand twenty-five, and the average was forty thousand.

So, the increase in spending is sixty thousand.

Now we apply the deduction rates.

First, we take twenty-five percent of the base amount, which is the average of forty thousand.
That gives us ten thousand.

Then we take forty-two percent of the increase, which is sixty thousand.
That gives us twenty-five thousand two hundred.

Finally, we add both amounts together.

Ten thousand plus twenty-five thousand two hundred equals thirty-five thousand two hundred.

So, the total deduction for Company A is thirty-five thousand two hundred dollars.

In Part 3, we’ll reinforce this with a second example and walk through the key strategic insights most companies miss.