Here are a few phrases we bet you’ve heard before. You can just write that off. Those are deductible expenses. That can be deducted. But do you know what they actually mean? If you have any doubts about what is a tax write off or how it works, we are here to explain and show you how you can do it right.
The Write Off
The first thing you need to know is that ‘write off’ is a colloquial term. It actually refers very largely to tax deductions. They reduce your taxable income. If you hear an accountant use the term write off, they are referring to the idea of financially reducing something. When tax season comes, individuals reduce or write off their taxable income by means of writing off business expenses.
Therefore, you must learn what is taxable income. In simple terms, it’s exactly what it sounds like. A part of your income that the government is able to tax.
If you want to reduce the taxes you have to pay for this income, you can use two methods.
- Reduce the taxes which you pay dollar for dollar by using a tax credit.
- Reduce the whole of your income hoping to move toward a lower tax bracket, therefore paying less tax.
However, it’s important to mention that a tax credit is very rare. Plus, it can prove fairly difficult to qualify for one. Deductions are easily the more common way to go.
You might also like – 4 Self Employed Tax Deductions to Keep in Mind
How Can Entrepreneurs Write Off Expenses?
Now that we are clear on what is a tax write off, let’s see how this can be achieved.
The simple manner in which to do this is by writing off your business expenses. They typically refer to operational costs. Let’s look at an example for a better understanding.
Let’s assume that Alice sells pineapples. She spends many hours driving back and forth because she conducts her business elsewhere from the plantation. Therefore, she can deduct the money she spends on gas as an operational cost for the business. Apart from that, Alice has also rented a space in town where she sells the pineapples. She can deduct the rent as well, including the insurance she took out and the employee she has.
However, let’s say Alice takes a trip to Thailand where pineapples grow. If, while there, she does not pick a single pineapple which she brings back to town and sells as part of her business, that trip cannot be deducted. It will be considered a personal expense. The law and the IRS, for that matter, will not consider it a legal write off. Therefore, you must very careful because there is a very fine line between the legal deductions and the personal ones.
If you know what is a tax write off, it can be a rightful lifesaver, especially when you are the owner of a startup with a small budget. Read our article carefully and start looking at all the options you have to save money on your taxes in a legal way.