What Does “Write It Off” Really Mean?January 19th, 2010 by Michael Kwan
*pause for grumbles*
This means that it’s time for you to get all of your paperwork in order and to buy some tax software of your choosing. This also means that you should familiarize yourself with some of the terminology related to income tax returns. Do you know what it means to “write it off” and what can be eligible as a “write-off” as part of your income tax return?
The Definition of a Writeoff
You hear the term thrown around all the time, but do you really know what it means? When a small business owner (like a freelance writer) buys some office supplies or goes out for a business lunch, he may say that the expense is a tax write-off for him. Does this mean that the effective price of the meal is free? No, not at all.
Regardless of your exact business structure, it is important that you take advantage of these so-called tax write-offs. While it does not mean that the expenses become effectively free, it can significantly reduce the amount of income tax you owe. Here’s how it works.
An Example Calculation
Let’s say that you earn $50,000 in revenue as part of your graphic design business, but you spent $10,000 in supplies over the course of the year. You saved all the receipt, of course. Assuming that these are legitimate expenses that were necessary in generating that revenue, you can “write off” the $10,000 in supplies. By doing so, you pay income tax as if you earned $40,000 that year rather than $50,000. When you “write it off,” you reduce your net income.
Continuing with this example, let’s say that this places you in the 25% income tax bracket. By not paying the tax on that $10,000 of income, you are effectively saving $2,500. It’s far from getting that $10,000 in supplies for free, but this can be a substantial discount. It can even bump you into a lower tax bracket.
Does this mean that you should head out and buy a computer right now? Not exactly. Using the above example, the supplies still effectively cost you $7,500 and that money could be better spent (or saved) elsewhere. Be mindful of where you spend your money, even if it is invested in your business, but do take advantage of any tax benefits that may result from these expenditures.
Like you, I’m not looking forward to doing my taxes either, but that’s the price you pay for living in a great country like Canada. I wouldn’t have it any other way.