Tax Write-Offs: How does it all work?

Many business owners want to write off as much as they can every year on their tax returns, but what does that mean and is it smart?

Now don't get me wrong, I have been guilty of saying phrases like "don't worry it's a tax write-off" or "I'll get that back on my tax return" in the past. Sometimes it makes sense in the moment and others it doesn't. That being said in talking to business owners everyday there is a lot of confusion around the idea of tax write-offs. Everything from what qualifies to how do I track them, can send business owners in a spiral. We're here to give some high level clarity on that.

Tax Write-offs, what are they?

A tax write-off is just a business expense that can be deducted for tax purposes. It is important to note that not all business expenses are tax write-offs. Some expenses incurred during the year cannot be deducted for tax purposes, or only a portion of the expense can be deducted.

Some examples of business expenses are Rent for your office, Cost of Materials for a customer job, cost of feed for your livestock, fuel, or any variety of other things. When in doubt think to yourself "Is this a purchase that will be used for business purposes?" If the answer is yes it more than likely will qualify as a business expense.

Why are Write-offs important?

It is important to understand why you would even care about these expenses and generally how they work. I have heard many people try and explain this topic an have heard everything from "It's a double deduction" to "You don't need to know just give it to someone who does."

Here is the easiest way to think about this in my opinion. All of the income that you bring in in a year fills up a bucket. As deductible expenses are incurred, that bucket begins to drain by that amount. At the end of the year, the amount left in the bucket is the amount that will be subject to tax (keep in mind different business structures have different tax structures).

So I want my bucket empty at the end of year?

Not necessarily. Everyone's tax situation is different, and each scenario has it's own intricacies. Our philosophy at Form Financial Management is to not only look at your situation today, but to give our best educated prediction on your tax situation over time. Our goal is to reduce your aggregate lifetime tax bill, not just this years. This involves using strategies around depreciation expense, employer benefits, and payment timings to best use the tax code in your favor.

Recordkeeping - How do I keep this all organized?

With the need for accurate financial data not only for tax purposes but for the daily business decision making, it is important to accurately track your business expenses. There are a variety of software's available to help with this. In choosing an accounting software it is important to understand the features that you will be utilizing, the monthly or annual cost. and the functionality of the software. When in doubt reach out to your accountant or bookkeeper for their advice on this decision.

Keep your eye out for our weekly blog covering topics such as Bookkeeping, Tax, Business Processes and Finance. If you have any questions, please reach out via call or e-mail to schedule an appointment.