What Is a Write-Off? Definition and Examples for Small Businesses
A write-off is a business expense that is deducted for tax purposes. Expenses are anything purchased in the course of running a business for profit. The cost of these items is deducted from revenue in order to decrease the total taxable revenue. Examples of write-offs include vehicle expenses and rent or mortgage payments, according to the IRS.
In this article, we’ll cover:
NOTE: FreshBooks Support team members are not certified income tax or accounting professionals and cannot provide advice in these areas, outside of supporting questions about FreshBooks. If you need income tax advice please contact an accountant in your area.
What Is a Write-Off?
A write-off is an expense that can be claimed as a tax deduction. Tax write-offs are deducted from total revenue to determine total taxable income for a small business.
Qualifying write-offs must be essential to running a business and common in the business’s industry. A write-off doesn’t need to be absolutely, 100 percent necessary, but it should be considered a normal expense that helps run the business, according to the IRS.
Most business expenses are deductible, either fully or partially. Small business owners try to write-off as many expenses as possible to decrease the amount of tax they need to pay.
A business must be for-profit in order to write-off its business expenses. A “hobby” business that isn’t run to make money can’t deduct its expenses on an owner’s taxes.
Small businesses usually fill out the form Schedule C to deduct business expenses from their taxes.
Read our simple guide to tax write-offs for small business for a complete picture of how write-offs work and what different business structures like sole proprietorships and LLCs can claim.
Tax Write-Offs for Small Business
Small businesses can typically write-off expenses in the following categories:
- Education and Training
- Car and Truck Expenses
- Rent and Lease
- Miscellaneous (bank fees, wages etc.)
- Employee Benefits (such as health insurance)
- Meals and Entertainment
- Office Supplies & Postage
Tax Write-Off Examples
In this section, we’ll look common tax write-offs for sample small businesses. These write-offs are not comprehensive, but give an idea of what different businesses could deduct on their taxes.
A small painting business can claim car mileage as a tax deduction since the workers need to travel for jobs. The owner has a team of five painters and can deduct their wages. Occasionally, the owner needs to hire contract workers for big jobs—contract labor is also deductible. All painting supplies purchased are also deductible. The owner works out of her home office and claims a home office deduction. She can also write-off her business cell phone, as well as the phone she provides to her lead painter. Finally, she claims the cost of her general liability insurance policy.
A graphic designer claims the rent for his home office. His home office is 20 percent of his total living space, so he writes off 20 percent of his rent on his taxes. He pays an accountant to do his taxes every year and writes off the fee. He also writes off advertising costs like his website domain and getting a professional headshot. He travels for a professional development conference and he writes off the cost of airfare and his Airbnb and 50 percent of all meals. Finally, he occasionally meets his clients for meals like coffee or lunch and writes off 50 percent of these expenses on his taxes.
A small legal aid clinic deducts the cost of its lease on equipment like a postage meter, fax machine and printer. They write-off the cost of their professional liability insurance as well as the cost of their employee benefit program and contributions to the employee retirement plan plus employer taxes like payroll tax (FICA). Their small office is mortgaged and the owner writes off the cost of interest on their mortgage as well as real estate taxes and the cost to repair damage to the office. The clinic has a line of credit that was used in an emergency to pay employee salaries and it deducts the interest on that loan. The legal clinic advertises on Facebook and on public transit and writes off these advertising costs.
People also ask:
What Is a Write-Off in Accounting?
In accounting, a write-off happens when an asset’s value is eliminated in the books. This happens when an asset can’t be turned into cash, doesn’t have market value or isn’t useful to a business anymore, according to Accounting Tools.
An asset is written off by transferring some or all of its recorded amount to an expense account. The write-off usually happens all at once instead of being spread over a few accounting periods. This is because a write-off is a one-time event that needs to be dealt with immediately.
A temporary measure is to credit a contra account until the write-off is assigned to a specific category. A contra account’s whole function is offset the balance of another account.
When an asset’s value is reduced instead of eliminated, this is called a write down.
- For example, a client refuses to pay a contractor for a renovation job. After some back and forth, the client agrees to pay 50 percent of the invoice. The contractor allocates half of the invoice’s value to an expense account and leaves 50 percent of the asset’s value on the books.
Write-offs help reduce taxable income, but if an owner gets carried away with using write-offs and write downs this can become fraud.
Why Are Assets Written Off?
Assets are written off because they’re no longer of value to a business.
Here are examples of situations where a write-off is necessary for a small business and how it’s handled in the books:
Accounts Receivable Can’t Be Collected
A general contractor has a $2000 invoice outstanding for a small bathroom renovation job. The client hasn’t paid. Finally, the contractor hears the client is bankrupt and unable to pay the bill. Outstanding invoices are categorized under accounts receivable. The contractor debits the category “bad debt expense” by $2000 and credits $2000 to a category called “allowance for doubtful accounts,” which offsets the amount owing in accounts receivable.
Inventory Is of No Use
Perhaps inventory is outdated or it can’t be sold due to an error in manufacturing. The cost of inventory can be added to the category “cost of goods sold” or its value can be offset using the obsolete inventory reserve.
A Fixed Asset Is of No Use
Fixed assets are items of value to a company that won’t be used up within a year and are intended for long-term use. A company might buy furniture for their office, however the company downsizes and the owner moves back to a home office. There’s no use for this office furniture. The office furniture’s value has depreciated thanks to wear and tear. So the depreciated value is accounted for and the new value is charged to a loss account.
Pay Advance Isn’t Returned
A new employee is given an advance on their pay as a favor from the owner. The employee unexpectedly quits before earning out their pay and refuses to pay the rest of the advance back. The balance is then shifted to the compensation expense account.