Write-Off Versus Non-Write-Off
We use the term write-off often in business. A write off is something that is tax deductible. So, you can count an eligible (IRS determined deductible) business expense or cost against your revenue. Or the expenditure will be added on the tax return as a credit or deduction. Thereby it reduces your taxable income or your taxes due. A non-write off is the opposite.
When working during the year a write-off would normally fall within the current year. There is a term rollover loss. A roll-over is a business net loss instead of a net profit that can be used to offset (reduce) any taxes in future years. Most people don’t know that the loss carryover expires. So many people have a goal to overspend to create a net loss each year to have zero taxes. Each year accumulates a loss that is not used in a profitable year and eventually the loss is lost so to speak.
The correct use of a loss carryover is to eventually make a profit. The loss carryover is created by write-offs during the year that accumulate to more than is needed to zero out taxable income or taxes due. But the goal is to have profitable years.
A write-off is a business expense and cost. But perhaps you have heard about writing off an unpaid invoice from a client. The write-off for a loss in sales is called a write-off because you classify the unpaid balance as a business expense as uncollectible or bad debt. Both are eligible for business expenses that would reduce the reflection of income from the invoice. No income, no tax on that customer. The uncollectible is then said to be a write-off.
The issue in business today is people want to write off personal expenses as business expenses. Here is where people get into trouble with tax collections down the road. Not because your tax preparer turns you in or completes your taxes correctly. Although that can happen. Often someone incorrectly completes a tax return and the following year it is different. The IRS will notice red flags and the persons can be marked as an audit candidate.
If you cannot justify your expenses and deduction or prove the tax return is correct or incorrectly prepared, then the client is responsible for the full balance. And even if your tax preparer incorrectly prepares the return, they are only responsible for penalties and interest not the tax. The primary reason I request that clients review their tax returns and ask me any questions. I want to make sure what I have is correct and if not, I need to make sure we have the correct information.
So, a write off is approved to add to your calculations for determining taxable or non-taxable income. And a non-write off is not approved. A non-write off is viewed as an expense that we would just have to take as a hit or eat as some people would say. Meaning it is a sunk cost of doing business and something that you cannot get back later.
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