What's a Write-Off?
Cracking the greatest mystery of the tax season.
As it turns out, corporate write-downs and personal tax write-offs aren't completely dissimilar. Both involve writing; both use hyphens; both refer to money. But that's about where the similarities end. In fact, it's the differences that are much more interesting – and useful.
First, what's a write-down? As of January 30th, financial institutions have written down about $135 billion combined. Thanks to the subprime crisis, all the heavy hitters had to make serious adjustments to their balance sheets, which spooked investors something fierce. At its core, a write-down is simply a readjustment of the value of an item on the books. Take that $2,500 Sony eight-disc CD changer you bought in 1996. Not worth so much anymore. You can write that puppy down about $2,450.
That's essentially what the big banks have had to do, except instead of writing down antiquated electronics, they're writing down assets associated with bad mortgages and loans. The loss of value is usually reflected in a company's income statement. That's why Merrill Lynch posted a net loss in 2007 of $7.8 billion and why Citigroup had a net loss of $3.62 billion.
The good news is tax write-offs are much more satisfying than write-downs, and like most things in life, pretty well summed up by Seinfeld:
Kramer: It's just a write-off for them.
Jerry: How is it a write-off?
Kramer: They just write it off.
Jerry: Write it off what?
Kramer: Jerry all these big companies, they write off everything.
Jerry: You don't even know what a write-off is.
Kramer: Do you?
Jerry: No. I don't.
Kramer: But they do and they are the ones writing it off.
In the episode referenced above, Kramer is delighted that Jerry can write something off (coincidentally, an old school CD player). Jerry, like many of us, has no idea what writing off is. In fact, it's pretty straight forward.
A tax write-off is an itemized deduction from your total income (your salary plus any interest earned on investments) on which you can be taxed. Let's say you make $100,000 a year and spent $1,000 on your small business. You're allowed to write that grand off. So instead of being taxed on $100,000, now you're just being taxed on $99,000. Simple.
Some business expenses you can write off: cost of goods sold, factory overhead, use of your car, advertising, stationary, business dinners. The list goes on. Just be sure to keep receipts to back up your claims and be able to prove that your business is above-board.
What not to do? In 2002, a Utah prostitute attempted to write-off, among other goods, birth control and make-up, claiming these items as business expenses. As you might have guessed, the IRS didn't buy it.
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