How will my stock purchase affect my taxes?
Assuming you are in the US, and are an average joe, the answer to your question is no. Investment costs do not reduce your taxable income for the year you make the investment. They do factor in to the cost basis of your investment and so will affect your taxes in the year you sell the investment. If you want to reduce your taxable income, you could contribute the $5000 to a traditional ira, or 401k, assuming you qualify. Depending on where the account is held, you may then be able to use that $5k to purchase stock in the company you are interested in. The stock would be held in your IRA or 401k account, and would be subject to more restrictions than a normal brokerage account. Purchasing stock doesn't affect your immediate taxes any more than purchasing anything else, unless you purchase it through a traditional 401k or some other pre-tax vehicle. Selling stock has tax effects; that's when you have a gain or loss to report.
Some other answers mention the ability to sell at grant. This is very important. If you have that ability, think about your guaranteed return. In my case, I get a 15% discount on the lowest 6 month window price from the last two years.  If you do the math, the worst case return can be calculated: 1) Money that from the beginning of the window, I make 15% for 6 months (30% annual return guaranteed) 2) Money at the end of the window (say the last month) is 15% for one month (180% annual return guaranteed) In the end, your average holding window for your money is about 3 months (you can calculate it exactly). At that rate, you have a guaranteed 60% annual return. You can't beat that anywhere, with a significant upside if your company stock is increasing. So, if your company has an instant sell at grant option, you have to be brain dead not to do it. If it takes time to get your shares, then you need to look at the volatility of the stock to see how big the chance of losing money is. To generalize to a formula (if that's what you want): WM = purchase window (in months); D = Discount Percentage; GR = Guaranteed Return GR = 12/(WM/2) * D = 6*D/WM One last thing, If you are going to participate in ESPP, make you that you understand how to do your taxes yourself. I haven't found a tax person yet who does ESPP correctly (including an ex IRS agent), so I always have to do my taxes myself to make sure they get done correctly. This answer comes from my interpretation of Publication 590 (2011), Individual Retirement Arrangements (IRAs) and particularly What Are Qualified Distributions? section. Please consult the sources yourself or with the help of a qualified professional before doing anything. First, note that due to the rollover loophole, you can take out the money and repay it within 60 days. Missing the deadline would mean paying the taxes on the withdrawal in addition to a 10% penalty. As per JoeTaxpayer's notes below, this applies to the earnings on the account only. The contributions themselves can be withdrawn without penalties (thanks, Joe!).  Second, you might qualify to withdraw 10k for a qualified first-home house purchase. Qualified, in this case, would mean first-time home purchase by yourself, your spouse, your child, parent, or grandchild, made within 120 days of withdrawal (see first home in the above document). Finally, nothing is mentioned about the withdrawal affecting your yearly contribution cap. Any new money coming into the account is new money counted towards the contribution cap (except for the 60 day loophole).  To answer your question then: you can make up the money only under the first scenario (60 day loophole). Qualified withdrawals allow you to avoid the penalties, but as far as I can tell, do not affect the contribution cap. There are a few other details that may depend on your age, reservist status, health, etc. Read the document carefully to see if any of those apply to you. "Exactly what accounts are affected by any given transaction is not a fixed thing. Just for example, in a simple accounting system you might have one account for ""stock on hand"". In a more complex system you might have this broken out into many accounts for different types of stock, stock in different locations, etc. So I can only suggest example specific accounts. But account type -- asset, liability, capital (or ""equity""), income, expense -- should be universal. Debit and credit rules should be universal. 1: Sold product on account: You say it cost you $500 to produce. You don't say the selling price, but let's say it's, oh, $700. Credit (decrease) Asset ""Stock on hand"" by $500. Debit (increase) Asset ""Accounts receivable"" by $700. Credit (increase) Income ""Sales"" by $700. Debit (increase) Expense ""Cost of goods sold"" by $500. 2: $1000 spent on wedding party by friend I'm not sure how your friend's expenses affect your accounts. Are you asking how he would record this expense? Did you pay it for him? Are you expecting him to pay you back? Did he pay with cash, check, a credit card, bought on credit? I just don't know what's happening here. But just for example, if you're asking how your friend would record this in his own records, and if he paid by check: Credit (decrease) Asset ""checking account"" by $1000. Debit (increase) Expense ""wedding expenses"" by $1000. If he paid with a credit card: Credit (increase) Liability ""credit card"" by $1000. Debit (increase) Expense ""wedding expenses"" by $1000. When he pays off the credit card: Debit (decrease) Liability ""credit card"" by $1000. Credit (decrease) Asset ""cash"" by $1000. (Or more realistically, there are other expenses on the credit card and the amount would be higher.) 3: Issue $3000 in stock to partner company I'm a little shakier on this, I haven't worked with the stock side of accounting. But here's my best stab: Well, did you get anything in return? Like did they pay you for the stock? I wouldn't think you would just give someone stock as a present. If they paid you cash for the stock: Debit (increase) Asset ""cash"". Credit (decrease) Capital ""shareholder equity"". Anyone else want to chime in on that one, I'm a little shaky there. Here, let me give you the general rules. My boss years ago described it to me this way: You only need to know three things to understand double-entry accounting: 1: There are five types of accounts: Assets: anything you have that has value, like cash, buildings, equipment, and merchandise. Includes things you may not actually have in your hands but that are rightly yours, like money people owe you but haven't yet paid. Liabilities: Anything you owe to someone else. Debts, merchandise paid for but not yet delivered, and taxes due. Capital (some call it ""capital"", others call it ""equity""): The difference between Assets and Liabilities. The owners investment in the company, retained earnings, etc. Income: Money coming in, the biggest being sales. Expenses: Money going out, like salaries to employees, cost of purchasing merchandise for resale, rent, electric bill, taxes, etc. Okay, that's a big ""one thing"". 2: Every transaction must update two or more accounts. Each update is either a ""debit"" or a ""credit"". The total of the debits must equal the total of the credits. 3: A dollar bill in your pocket is a debit. With a little thought (okay, sometimes a lot of thought) you can figure out everything else from there." If your purchases are done at year end, but the money withheld over that 12 month period, the 17% return is for an average time of 6 months, and the return annualizes to 38% or so. All due respect to Alex B, the return would be 100/85 as he states, if the investment were funded in January and sold in December. But this isn't the case on ESPP, the average time you are out that money is 6 months.  I will warn you. Don't let the tax tail wag your investing dog. It's easy to wait for long term gains to kick in and then ignore the stock. You then find yourself overloaded on one stock and risk some bad losses. I enjoyed my 15% discount all the way to the stock crashing by 60%+. If you must wait and hold some, be religious about selling the long term shares like clockwork. The 15% is virtually risk free (unless the shares crash between purchase and hitting your account.) "For example, if I have an income of $100,000 from my job and I also   realize a $350,000 in long-term capital gains from a stock sale, will   I pay 20% on the $350K or 15%? You'll pay 20% assuming filing single and no major offsets to taxable income. Capital gains count towards your income for determining tax bracket. They're on line 13 of the 1040 which is in the ""income"" section and aren't adjusted out/excluded from your taxable income, but since they are taxed at a different rate make sure to follow the instructions for line 44 when calculating your tax due." E.g. I buy 1 stock unit for $100.00 and sell it later for $150.00 => income taxes arise. Correct. You pay tax on your gains, i.e.: the different between net proceeds and gross costs (proceeds sans fees, acquisition costs including fees). I buy 1 stock unit for $150.00 and sell it later for $100.00 => no income taxes here. Not correct. The loss is deductible from other capital gains, and if no other capital gains - from your income (up to $3000 a year, until exhausted). Also, there are two different tax rate sets for capital gains: short term (holding up to 1 year) and long term (more than that). Short term capital gains tax matches ordinary income brackets, whereas long term capital gains tax brackets are much lower. Yes. As long as the stock is in a taxable account (i.e. not a tax deferred retirement account) you'll pay gain on the profit regardless of subsequent purchases.  If the sale is a loss, however, you'll risk delaying the claim for the loss if you repurchase identical shares within 30 days of that sale. This is called a wash sale. The benefit is not in taxes. When you sell a portion of your stock, you no longer have a portion of your stock. When you get a dividend, you still have a portion of your stock. Dividends are distributed from the net profits of a company and as such usually don't affect its growth/earning potential much (although there may be cases when they do). So while the price takes a temporary dip due to the distribution, you're likely to get the same dividends again next year, if the company continues being similarly profitable. If you sell a portion of your stock, at some point you'll end up with no more stocks to sell.