What is a Write-Off
A write-off is a deduction in the value of earnings by the amount of an expense or loss. When businesses file their income tax return, they are able to write off expenses incurred to run the business and subtract them from their revenue to determine their taxable income. For example, if you spent money on dinner to take out a client, a portion of that expense acts as a write-off against your business income because the cost of the dinner is a business-related expense.
BREAKING DOWN Write-Off
A write-off can occur when one of your business clients owes money to you but the client has business declared bankruptcy and is unable to pay the invoice to your company. The uncollectible debt is considered a loss, and your company can write it off on its tax return. A write-off is a type of deduction, and, in some cases, the words may be used interchangeably. For example, when a self-employed person or small business owner files his income tax return, he often refers to his business write-offs as deductions.
The other type of write-off is when a company removes an account or asset from its books. That is, an asset's value has been reduced or gone to zero; thus, it's written off the books. Other types of write-offs may include bad debts or uncollectible debts, which must be removed from the books.
Write-Offs, Standard Deductions and Itemized Deductions
Not every deduction is considered a write-off. In particular, the Internal Revenue Service allows individuals to claim a standard deduction on their income tax return, and most tax filers do not refer to this deduction as a write-off.
In other cases, individuals claim itemized deductions instead of the standard deduction. To itemize their deductions, taxpayers simply add up qualifying expenses and claim the total against their income. Sometimes referred to as write-offs, itemized deductions include interest on mortgages, some medical and dental bills, charitable contributions, disaster and theft losses, and a range of other items.
How Tax Write-Offs Work
Tax write-offs simply lower an individual's or business's taxable income, and thus the tax liability. For example, imagine your business earns $100,000 in revenue but spends $50,000 on payroll, utilities, rent, inventory and other operating costs. When you file your income tax return, you report the income and the expenses, and as a result of the write-offs, your taxable business income is only $50,000.
Write-Offs vs. Credits
Credits are sometimes confused with deductions and write-offs, and although they lower your tax liability, they work much differently. A tax credit is applied to the tax you owe and used to reduce it, and refundable tax credits can even trigger a tax refund. For example, imagine you owe $10,000 in taxes but are eligible for a $3,000 credit. The credit lowers your tax bill to $7,000. Similarly, if you owe $5,000 in taxes but qualify for a $6,000 refundable tax credit, you receive a $1,000 tax refund.