Whether it’s something you want to acknowledge or not, it is something that will be coming across your desk in the next couple of months. That’s right, folks, it’s income tax season again.
*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
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.
Worry-Free Spending?
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.
I want to add that if you make less than 40,000.00 in the US you can do your taxes online with certified tax software by Inutit, HR Block and others for FREE. Just go to the IRS site for a list.
You wouldn’t have it any other way, but if I have sufficient business income, I would be preparing to leave Canada as soon as it is feasible to do so to a low-tax, if not no-tax overseas jurisdiction.
Good stuff. The thing I love running a home business, and yes it is different for everyone, is the money freedom, what is your own?
Thank you for the clear explanation! I had an idea of what it meant to write off your taxes, but your article clarified it for me. Thanks for the specific examples, too.
That was a good simple read.