The Entrepreneur’s Guide to Tax Write-Offs

Business owners experience many perks, such as boosting your tax refund while lowering your taxable income with write-offs.

The IRS allows businesses to deduct expenses that qualify as "ordinary and necessary" to reduce taxable income, thus saving your business money at tax time.  

Before we get into what you’re able to write off, you must first understand what a write-off is and how they get applied to your tax responsibility.

What is a Write-Off?

A write-off is any business expenses that get deducted for tax purposes.

This definition raises the question of what constitutes a business expense. A business expense is anything purchased while operating your business for profit. 

You receive tax savings from these expenses since they are deducted from your taxable revenue, possibly bringing you into a lower tax bracket.

To be eligible for write-offs, you must be a for-profit business and complete a Schedule-C document to deduct expenses.

Small businesses can typically write-off expenses in these categories:

• Advertising
• Education or training
• Car and truck expenses
• Contractors
• Rent and lease
• Bank fees
• Wages
• Employee benefits
• Travel
• Meals and entertainment
• Office and postage supplies

Most of these business expenses are deductible, either fully or partially.

Self-Employed Write-Offs

Contrary to popular belief, self-employed individuals do not incur lower taxes if they set up their business as a corporation instead of a sole proprietorship.

You can take advantage of many of the same tax deductions as a corporation, and you may be eligible for the 20% Qualified Business Income (QBI) deduction, which would be paired with a lower personal tax rate as well.

The IRS defines QBI as “the net amount of qualified items of income, gain, deduction, and loss from any qualified trade or business”.

The QBI deduction allows those who are eligible to deduct up to 20% of qualified business income, in addition to 20% of any qualifying real estate investment trust dividends and qualifying publicly traded partnership income.

Additionally, you may be eligible for some other deductions, such as the total cost of business equipment in the first year of use up to $1,050,000.

Also, in some cases, if you use a non-SUV vehicle for business, you may qualify for a deduction of up to $25,000 if it weighed less than 14,000 pounds.

Whether you run your business as a corporation or sole proprietorship, you are likely to qualify for many tax write-offs.

Write-Offs in Accounting

In accounting, a write-off occurs when the value of an asset is removed from the books because it cannot be converted into cash or has lost its market value.

Essentially, all or part of the asset gets transferred to an expense account, which usually takes place simultaneously rather than splitting it between accounting periods. This is because a write-off is a one-time event that needs to be taken care of right away.

On the other hand, accounting could have write-downs, meaning an asset’s value is reduced rather than eliminated. For instance, let's say you’re hired for a job, and the client refuses to pay you for your work. After countless back and forth interactions, they finally agree to pay for half of the invoice, so you allocate half of the asset’s value to the expense account while leaving the other half on the books.

Write-offs can significantly reduce taxable income, but if misused, they can result in an audit and be fraudulent.

Tax Misconceptions

These tax misconceptions can land you in serious legal trouble or even jail time. Thus, be sure you are not stretching the truth to misuse write-offs for which you're ineligible. 

These are some common tax write-offs you should avoid:

• Marking personal expenses as business expenses.
• Claiming mixed-use areas of your home as a home-office deduction.
• Deducting personal bills as a business expense, such as phone or internet bills.
• Claiming personal travels or family vacations were business trips.

Before claiming any write-offs, consult your accountant to avoid IRS audits, fines, or jail time.

When handled correctly, tax write-offs are a great benefit of being self-employed. However, consider speaking with your accountant before claiming any write-offs to ensure you of eligible status.

Take the time to do proper research and keep detailed records so you can maximize the benefits of tax write-offs and ease some of the financial burdens that come with running your own business.

DISCLAIMER: Any advice relating to finance, investments, stocks, companies, securities, or any other financial matters whatsoever reflects the private opinion of the person giving this advice. It is not the advice of a financial, investment, or other experts. Fund&Grow, its employees, and representatives take no responsibility for any consequences resulting from following such advice. Anyone seeking professional advice is strongly advised to conduct their own research or consult a professional financial adviser. Do not disregard professional financial opinion or make any financial decisions based on what you may read in Fund&Grow's Blog. You are solely responsible for any investment or other finance-related decisions you make.

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