Tax write-offs are one of the best ways to maximize your savings and reduce your liability. But for many business owners, especially those with high-volume expenses, write-offs are among the most confusing parts of the tax filing process. To ensure you go into tax season with confidence, read on. We’ll explain how tax write-offs work and list some common write-offs that apply to most small businesses.
Tax Write-Offs: What They Are & How They Work
A tax write-off is any IRS-approved business expense that can be “written off” or deducted from your taxable income. To meet IRS approval, these expenses must be “ordinary” and “necessary” to operate your business. For example, save your receipts if you traveled to an industry-related conference. You may be able to write off a portion of your flights, business-related meals, hotel accommodations, and more. The same applies to office supplies, advertising, or other expenses directly connected to your business.
What is the Difference Between a Tax Write-Off & a Tax Deduction?
“Tax write-off” and “tax deduction” are interchangeable phrases that mean the same thing. In other words, if you write off an expense, you also deduct it from your taxable income. The inverse also applies.
What is the Difference Between a Tax Credit & a Tax Write-Off?
While tax credits and write-offs can reduce your tax liability, they operate differently. Write-offs reduce business income; tax credits reduce your tax liability.For example, if a company generates $100,000 in income and deducts $10,000 it paid for employee insurance, its net taxable income would be $90,000. That insurance policy would be a write-off. At a 10% percent tax rate, the tax liability would be $9,000. To further reduce liability, the company may use qualifying tax credits. Examples include a small business healthcare credit, retirement plan startup credit, disabled access credit, and more.
How Do Tax Write-Offs Work?
To calculate write-offs, keep track of all business-related expenses incurred throughout the year. To simplify, group expenses into common categories like:
- Advertising: If you spend money promoting your business, you have a write-off. These expenses may include printing costs, hiring a freelancer to design a logo, launching a new website, running a paid media campaign, and more.
- Legal fees: If you spend money on a lawyer, accountant, or other financial professional, you can deduct those fees.
- Insurance: Business insurance costs may also be written off.
- Bank fees: Banks generally charge fees and interest on loans and credit lines. As long as these fees meet IRS stipulations, these fees may be written off.
- Depreciation: Computers, furniture, vehicles, or any other business-related assets with an extended life can be written off. However, the IRS depreciation rule requires that you spread these costs over the time you’ll use them rather than all at once.
- Transportation: If you used a vehicle to do business, you may either write off actual expenses like maintenance and gas or use the mileage rate.
Of course, this is only a short list of categories, so consult with a tax professional for more detailed information on tax planning.
Save Time, Money, and Stress this Tax Season
Don’t let tax season hold you back or cause unnecessary stress this year. Our expert team of CPAs is here to provide the bookkeeping support and tax planning services your business needs to thrive, allowing you to focus on what truly matters—building and expanding your business. Contact us today to learn how we can help your business!