Understanding Business Write-Offs and How to Make One. If you have a business, you must find any ways to reduce the amount of taxes that you need to pay annually. One of the best methods is to take advantage of business write offs. What is it?
In terms of taxation, a write-off is any deducted business expense that is both valid and legal. You run the business supported by various expenses, no? Any costs that you spent for the sake of business profit are considered business expenses.
The purpose of a write-off is to reduce the cost of those items to decrease your overall taxable review. Any business owner can claim it by following the IRS’s rules and policies. Usually, this is the best practice for small businesses.
Qualifying Business Write-Offs
In the business industry, all owners should know how to qualify write-offs. You must ensure that those expenses are necessary or help your business to run properly and to make profits.
The good news is most business expenses are deductible, either partially or fully. If it is possible, you need to deduct as many expenses as possible. This helps you to reduce the tax amount you need to pay later.
To quality business write offs, your business should focus on earning profits. That means any charitable or hobby businesses are not likely to pass the qualification. Thus, you need to ensure that you run a company that is meant to get net income.
For small businesses, you only need to fill out the form Schedule C to reduce expenses from your taxes. The IRS has introduced guidelines regarding how the owners can file out that form.
Various Write-Offs for Small Business
If you run a small business, you can claim deductions or tax write-offs in these common categories:
- Education and training
- Car and truck expenses
- Health insurances
- Rent and lease
- Postage and office supplies
- Contractors and freelancers
- Bank fees
- Employee benefits
- Entertainment and meals
Write-Off in Accounting
Do you know that write-offs are also applicable in accounting? This happens when there are eliminations of asset’s value in the books and the asset can’t be sold or turned into cash. This also happens when your business doesn’t need it anymore.
To be exact, the asset that has no market value can be included in write-offs. So, how can you do it? You can write off an asset by transferring either partial or whole recorded amount of the asset to an expense account.
You can do this at once instead of in several accounting periods. These business write offs in accounting needs to be done immediately. You should remember that the purpose is to reduce the value of the asset instead of eliminating it.
Let’s take an example of it. Let’s say there is a lag in payment for a renovation job. The contractor has not received payment from the client. It is because the client refuses to pay!
After discussions, the client only agrees to pay half of the invoice. As a contractor, you can place the half of invoice’s value in a cost account and leave another half on the books. That’s how you do it.
Here is the key point. You can use write-offs to reduce business taxable income. However, you need to use it wisely and don’t get carried away with it. If IRS finds any abuse in this practice, you will get into trouble as it becomes fraudulent.
How to Write Off Business Costs
At this point, you have learned the importance of write-offs in business expenses and taxable income. You also have found out several examples of business costs that can be written off. So, let’s learn how to claim them.
1. Categorize costs or purchases
The most important thing to do is to categorize business purchases. That means you need to find out those that qualify the write-offs and those that don’t. At the very beginning of the year, you should have categorized them. Have no worries. You can take advantage of specific software to track your business expenses.
Here is an idea. Don’t mix your expenses with business purchases. It is recommended to have a separate credit and debit card for those two costs. This way, you can do business write offs accounting easier at the end of the year, especially related to your industry.
This business card is quite useful either to pay numerous expenses like social media advertising, business hardware, freelances, and many more. Though, not all purchases are fully deductible.
This is why you need to learn the categories first, especially business expenses that can qualify for the deductions. You also need to keep track of your expenses throughout the year.
2. Add them up
As long as you have complete records of business costs along all the year, you can easily add them up to claim deductions from gross income. The good news is you can use accounting software to do that job.
Using accounting software is recommended, as it helps you simplify the task. On the other hand, saving receipts manually would take much time and effort when it comes to filing taxes and adding up business write offs.
Some of you may wonder what costs can be deducted for the tax year. Have no worries. The IRS would publish an annual issue regarding lists of business tax deductions and other related information. As a business owner, you need to learn that so that you know which costs to track.
3. Schedule c
At this point, you have added up business expenses (totals). What’s next? You need to include them on the itemized deductions of Form 1040 Schedule C. This form applies to everyone, including employees, self-employees, business owners, and others.
One thing, you should match the file the tax return right. For those who run a corporation, filing a corporate tax return is the right choice. Later, you can subtract totals of expenses spent for business purposes against your gross income. The result is an adjusted gross income that you need to pay in self-employment tax.
That tax is around 15.3%, which is considered higher than regular income tax paid by most people. You can avoid this by structuring your business operation as a corporation instead of self-employment.
By reading the end of this article, you should have learned the basics of business write offs and how to claim them. The extra information above is also useful to help you understand this term better.