“I don’t care how much it costs… I can write it off!”
Perhaps you’ve heard others say it, or you’ve said it yourself before.
While tax write-offs are a welcomed tool to reduce taxes, they should not be the deciding factor in making a buying decision for your business.
Just because it’s legal to write-off a piece of software or a new printer, doesn’t mean they’re free. You still need to pay for them.
Unfortunately, the term write-off is used loosely, often without distinction between individual or business; and frequently, the terms are used interchangeably. It may be one of the reasons there are misconceptions about write-offs.
What Are Write-Offs?
Deductions also referred to as write-off, are allowable expenses deducted from taxable income on a federal or state tax return.
Businesses owners are not the only ones allowed to deduct expenses from their income; non-business owners are too. However, the number of possible deductions for individuals is limited.
When you file your yearly tax return, you’re allowed to claim certain deductions, such as mortgage interest expense, relocation expenses, student loan interest, property tax, to name a few.
As a taxpayer, you have the option to either claim individual deductions or go with the standard deduction. Either way, it will reduce the amount of taxes you’ll pay.
Since allowable deductions change over time, it’s essential to keep up to date with changes.
In addition to claiming personal deductions, business owners may also claim business deductions.
Depending on the legal structure of your business, it may further reduce your personal income (flow-through entities) or reduce the income for your business (corporate entities).
Here’s What’s Important
To claim a deduction for your business, it must be a business expense that is:
- ordinary and
That means necessary business expenses incurred during the normal course of doing business. Sadly, your trip to Australia to “investigate practice opportunities” probably does not qualify.
But not all business deductions are created equal.
Some are fully deductible, while others qualify for a percentage deduction only. Make sure you know which expense qualifies for what deduction.
While ordinary and necessary business expenses are deductible, they will always be deducted against business income. In general, if there is no income, there’s nothing to deduct.
However, it doesn’t mean you can’t deduct expenses, including startup costs later on; check with an accountant.
Here’s The Point…
All expenses, to qualify as legitimate business deductions, must be ordinary and necessary. But beyond that, they must also be necessary and ordinary for you, and your business!
Don’t allow yourself to get seduced by the call of “new and better,” justified with “it’s a write-off.”
As I said earlier, just because you can write it off, doesn’t mean it’s free. You still need to put your hard-earned cash on the table in exchange for the product of service.
And remember that depending on the purchase, you may only get a small deduction for every dollar you spend. And on top of it, you will have to pay the total purchase price upfront and wait to get your deduction until tax time.
So before you consider a purchase for your business, ask yourself:
- Do I truly need this in my business today?
- Am I seduced by the promise of new and better?
- Is my decision influenced because it is a write-off?
- Would it be better buying used and get less of a write-off?
- Would it be better to lease instead of buying?
- How soon would I see a return on investment?
Too many times we’re attracted to new, better, and it’s on sale; that’s true for personal and business life alike.
Because when you think about it, getting a deduction when you make a purchase is like getting it on sale.
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By Johanna Hofmann, MBA, LAc; regular contributor to the NPBusiness blog and author of “Smart Business Planning for Clinicians.“