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Basic tax questions

yveskleinsky

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This is a really basic question, but can someone explain how a write off works, and when is the best time to use one?

For example, a person makes $100k. They pay $15k to taxes, but they have a total of $20k in "write offs" can you get back more than you paid in?
 

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AroundTheWorld

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"Write off" is another word for "expense"

When people talk about "this is a write off" - it is usually an expense that can be included in the business books. For example, a cell phone.

Say your biz makes 10,000
You spend 1,000 for your cell phone and cell phone bills

Now, you will only be taxed on 9,000 instead of 10,000. Your phone was a "write off"

A write off is not something that you "get back" from the IRS - - it is a tool to reduce how much you pay to the IRS
 
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yveskleinsky

yveskleinsky

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That makes more sense- so if I am getting money back at the end of the year, or reporting a loss, then I shouldn't really focus on "write offs" as they would do me no good?
 

AroundTheWorld

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I personally think people make a big deal about write offs when they shouldn't.... often times, the exuse of a "write off" is used to justify a purchase.

For example - lets say you are in a 15% tax bracket. You will pay 15% of your income (after write offs have been subtracted).

You want to buy a new computer. (I don't know if this can be written off entirely in the first year or if it has to be depreciated over a few years) - but lets assume the entire purchase can be written off. Let's say the computer is 1,000 dollars and you don't really need a new one - but you want a new one, and hey... it is a write off ... so why not?

Well - you are spending 1,000 dollars and reducing your tax bill by $150 (15% of $1,000) Your "net cost" of the computer is actually $850. To me, it doesn't make sense to spend $1,000 so that I can save $150.

So.... don't spend money just so you can get the write off.... but on the other hand.... take all the deductions (expenses / write offs ) you can - as it will reduce your tax bill.

As for the more intricate questions such as getting money back/taking a loss, etc. I defer to others more knowledgable then I!
 

Diane Kennedy

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Aug 31, 2007
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That makes more sense- so if I am getting money back at the end of the year, or reporting a loss, then I shouldn't really focus on "write offs" as they would do me no good?
If you end up with a loss from your business, it carries forward to a year when you have income.

Just yesterday I had to explain to a client why we couldn't go back to 2002 & 2003 and pick up his losses to offset his very high (and unexpected) income. This year he made a net of $510,000 - and made none of his estimated tax payments. Ouch! He had losses in 2002 and 2003 and said there were a lot more "write-offs" that he could have taken but didn't because he already had a loss. So, could we just add those into this year's? Answer: No.

He then wanted to know if we could just amend the past year's returns to pick up the extra loss. Answer: No. That's because those years are now "closed." You can only go back 3 years from the filing date of the return to do amendments. And then you still want to be careful doing that because you're almost assured of an audit when you do.

So...lesson in all this - if you have losses, and they are legitimate, take them now. Don't spend money you don't have to, just for the write-off. (That's a return of cents on the dollar) But, don't be afraid of the deductions either.
 
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yveskleinsky

yveskleinsky

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Interesting. Man, there is just so much to learn!

Diane-

Can you post how we can get ahold of your company/ one of your trained CPAs?

...Also, at what point would you recommend that we start with them? I don't have a lot coming in or going out- would it still be worthwild for me to proceed with your company at this point?
 

Diane Kennedy

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Check out my website www.DKAffiliated.com. Or you can call Richard at 602.258.0700, extension 5.

If you're just started, it might be helpful to talk to one of our CPAs to make sure you've got the right business structure and taking the deductions you should (with good record-keeping). We have a new program that's not yet on the website. It includes a quick review of where you, guidelines for next steps and is much more affordable for people just getting going. Give Richard a call and he can explain.

To be honest, it's hard to say 'when' is the right time. There have been times when I've thought a client's business plan would never take off and so advised they didn't need to spend the money getting all the bells and whistles set up...and then had them take off BIG TIME. (One idea that I thought would never work has so far made the owner over $50,000,000 - goes to show you what I know sometimes!)
 

John

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Sep 18, 2007
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My simple rule of thumb when I'm evaluating a business-related purchase is this: If I expect to be in the 35% tax bracket for the year then anything that can be justified as a business-related expense is 35% off. So, if I'm considering a new $1000 flatscreen, I figure that the actual cost will be $650 and make my decision based on that.

This is also useful for doing cost/benefit analysis of other types of expenses. For example, if you're considering hiring an additional employee at $50,000 per year, keep in mind that the actual after-tax cost to you is only $32,500 per year (assuming 35% tax bracket).

This can be adjusted according to whatever your tax bracket is. If you want to be extra accurate you should figure in your state tax bracket too, which will give you additional "savings."
 

Diane Kennedy

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Aug 31, 2007
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Good point John. Just a reminder, the flat screen would have to be "ordinary" and "necessary" to the production of income within your business. Not everything is a deduction..... (I didn't mean that you would deduct something you shouldn't, just for anyone else who might read this)
 

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