So, what is a write-off? In finance, a write-off is an action that reduces the value of an asset while simultaneously debiting a liability account. It is mainly used in its simple sense by businesses seeking to account for unpaid loan obligations, unpaid receivables, or losses on stored inventory. Sounds like a lot of information to handle, don’t worry; we’ll break it down. You’ve probably heard a friend or a colleague say that an item is a tax write-off, then goes ahead and buys an expensive item. Tax write-offs are not easy to understand, and it takes a lot of planning and accounting to make write-offs worth the hustle. So, read on to find out how you can save lots of money on write-offs.
Let’s Start Here: What are Tax Deductions and Tax Credits?
To understand how tax write-offs work, you need first to comprehend what a tax deduction is. The first term to understand is gross income. You’ve probably heard it. Gross income is the total amount of income you make from all the different income streams you have. According to financial experts at keepertax.com, a tax deduction is the amount of money you subtract from your total gross income to be submitted for government tax purposes. Hence, tax write-offs are beneficial if you itemize your deductions by adding many of them to your business.
Unlike a tax deduction, a tax credit is a money-to-money refund. It’s important to understand that tax write-offs are not equal. Tax credits are worth more to lower-income earners and diminish as your income increases.
Buy Vehicles and Equipment to Foster Depreciation Deductions
If you own a small business, then your business can take tax write-offs on the purchase of machinery, business equipment, and even better, real estate. In many instances, the best time these write-offs can be taken is the first year you buy and own the equipment. According to various financial rules, some policies may allow small businesses to immediately deduct certain asset costs after they put them in service. Get advice from your tax accountant to determine if you qualify, especially if you’ve bought any significant assets.
Standard and Itemized Deductions
You can reduce your taxable income by itemizing your deductions or going for the standard deduction. Many people opt to claim the standard deduction because it’s easier to calculate, and it provides better write-offs.
If you choose to itemize your deductions, then you can write-off different types of expenses such as:
- Union dues
- Mortgage interest
- Employee business expenses
You may also decide to deduct individual taxes, such as real estate taxes and your local income and state taxes.
You may not have realized this, but charitable contributions in the form of stock, merchandise, or cash are deductible. If you or any other person receive any benefits from the contribution, you can only subtract the amount that exceeds your benefits. While it’s not wrong to participate in charity events, make sure to keep detailed records and receipts of your donations, including any itemized receipt from the charity. Remember, charitable contributions are only eligible for deduction if the recipients have documentation showing they are a qualified organization.
Dental and Medical Expenses
These expenses are deductible in the year they are paid. As such, expenses must be incurred to prevent or treat a physical or mental condition for yourself or any listed dependents. Some of the eligible expenses include:
- Lab tests
- Doctor and clinic fee
- Health insurance premiums
- Medical equipment
It’s important to note that accepted insurance premiums include health insurance for self-employed workers. There is also a premium plan for employees who are not eligible for a subsidized health plan. Payments for weight-loss programs are also deductible if the program is prescribed by a healthcare practitioner to curb a specific condition or disease. Other deductibles include transportation costs for medical care and health club fee, which is not deducted.
You can write off the cost of your home office if it is your principal place of work. This means it’s where you work every day. If you have another office space nearby which you also use and use the home office on other days, the home office doesn’t qualify as a deduction. You can deduct the rent on your other office, but you cannot deduct both. If your home office qualifies, you can deduct costs like mortgage interest, utilities, and repairs, for the percentage of your home occupied by the office.
I hope this guide gave you an insight into write-offs. As much as finance and accounting may sound, having the right information is vital in understanding how write-offs work.