How Tax Write-offs Lower Your Business Taxes

How to Lower Business Taxes With Write-offs

Business Tax Write-offs
Business Tax Write-offs. Dan Brownsword/Getty Images

What is a Tax Write-off?   

You may have heard the term "write-off" as it relates to taxes. There are actually two different meanings of the term "write-off," and this term is different from a "write-down." Both write-offs and write-downs can lower your business taxes, so you can keep money in your business. 

 A Tax Write-off  is a deduction for a business expense that reduces the net income of the business on a business tax form.

 

Can All Business Expenses Be Written Off? 

Your business can take write-offs for legitimate business expenses. with some exceptions that the IRS will not allow. But, the IRS (of course) has two major qualifications. To be deductible, each expense must be ordinary and necessary. The IRS says: 

An ordinary expense is one that is common and accepted in your trade or business. A necessary expense is one that is helpful and appropriate for your trade or business. An expense does not have to be indispensable to be considered necessary.

Expenses that are listed on your business tax return are certainly deductible as ordinary and necessary. An ordinary expense doesn't have to be one you use all the time; you may buy it once and never again, but it's something that other similar businesses would buy. Necessary has a minimal connotation; the item or service doesn't have to be indispensable. 

Business Costs That Can't Be Written Off

Some businesses expenses can't be written off because they are handled differently for tax purposes.

These expenses include: 

Of course, personal expenses you pay through your business can never be written off, including your federal income tax payments. 

How Do These Tax Write-Offs Work?  

To see the effect of these write-offs (deductions), look at a typical Schedule C for a small business.

 

1. You begin the Schedule C by including information on your business income. 

2. After the cost of goods sold section, you list all of your business expenses, in the categories provided by the IRS. You can also include other business expenses, on an additional listing. Don't forget to include business travel, meals and entertainment expenses, and other incidental expenses

3. These expenses are totaled and subtracted from your income. The total is your net income (your business profit), which is taxable to you as the business owner. 

Tax Write-downs and Depreciation

You may also have heard the term "tax write-down," which is similar to a tax write-off. Sometimes the two terms are mistaken for each other.

A write-down is an accounting transaction which reduces the value of an asset to $0. This reduction can be because the asset no longer has value because of depreciation or because of damage. An asset is written down (sometimes stated as a write-off, just to confuse everyone) when it is no longer usable or becomes obsolete.  

The Bottom Line About Write-offs

The important thing to remember is: The more write-offs, the less business income tax you owe.

In addition, the more write-offs, the lower your self-employment tax (Social Security and Medicare tax for business owners), which is also based on your business net income.