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#1
Old 09-07-2007, 03:10 PM
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What does 'writing something off' actually mean?

So, my suster and brother-in-law are owner-operators of a large truck, and they haul lumber from the north country to the south.

Last time I was up to see them, they had a new personal truck, and said they 'wrote some of its expenses off' as a company vehicle. The implication was that they reduced what they paid for it somehow, and made the vehicle more affordable.

Then there were the friends I went out to dinner with, and they paid for it, and said it was a 'business espense' because we talked about film editing for a couple of minutes.

So what does 'writing something off' actually mean?

I understand that if you ise a business vehicle for personal use, you have to pay back to the business for that, and vice versa for using a personal vehicle for business use. Likewise you can get reimbursed from the business for dedicating part of your house to business use.

But if I take a hypothetical client to dinner, how does the money paid for the dinner affect my hypothetical business? Does the expense reduce my net profit and hence taxes?
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#2
Old 09-07-2007, 03:14 PM
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Quote:
Originally Posted by Sunspace
But if I take a hypothetical client to dinner, how does the money paid for the dinner affect my hypothetical business? Does the expense reduce my net profit and hence taxes?
This is the reason. Business are able to deduct expenses from their income before calculating taxes.

Last edited by garygnu; 09-07-2007 at 03:16 PM.
#3
Old 09-07-2007, 03:18 PM
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Quote:
Originally Posted by Sunspace
But if I take a hypothetical client to dinner, how does the money paid for the dinner affect my hypothetical business? Does the expense reduce my net profit and hence taxes?
Yes, exactly . Writing something off means that it is a deduction from income tax. If you pay $100 for a dinner and pay 25% in income tax you save $25 in tax if the dinner is fully deductible. That means that the meal actually costs $100, and not $125. Some people seem to think that writing stuff off makes it free.
#4
Old 09-07-2007, 03:19 PM
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What you get for your product/service is not all profit. To determine your profit you subtract expenses, losses, and capital cost from your total received funds. There are books and books about what is and what is not a deductible expense, or casualty loss.

Writing that amount on your balance sheet is referred to as writing it off. If you have a bad debt, and can reasonably assume that it is never going to be paid, you can write it off as a loss. The phrase drifted around as such neologisms do, and became slang for giving up on something.

Tris
#5
Old 09-07-2007, 03:29 PM
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Quote:
Originally Posted by Mikemike2
Yes, exactly . Writing something off means that it is a deduction from income tax. If you pay $100 for a dinner and pay 25% in income tax you save $25 in tax if the dinner is fully deductible. That means that the meal actually costs $100, and not $125. Some people seem to think that writing stuff off makes it free.
I am amazed at the number of people that imply that writing something off makes it free or almost free. It doesn't fit the term urban legend that well but urban misconception may be a better term. I swear that businesspeople themselves often make it sound like writing something off gets them something off equal value for free which I always found odd. I can see why people get confused.
#6
Old 09-07-2007, 03:36 PM
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Originally Posted by Mikemike2
Yes, exactly . Writing something off means that it is a deduction from income tax. If you pay $100 for a dinner and pay 25% in income tax you save $25 in tax if the dinner is fully deductible.
Just a quick nitpick, food and entertainment is generally only 1/2 deductible.
#7
Old 09-07-2007, 03:42 PM
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Quote:
Originally Posted by Shagnasty
I am amazed at the number of people that imply that writing something off makes it free or almost free. It doesn't fit the term urban legend that well but urban misconception may be a better term. I swear that businesspeople themselves often make it sound like writing something off gets them something off equal value for free which I always found odd.
Yes. As Kramer said on Seinfeld, when called on his claim that the US Post Office "just writes off" insurance claims against packages damaged in the mail:

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're the ones writing it off!

It does all make a sort of sense, you see?
#8
Old 09-07-2007, 03:44 PM
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Quote:
Originally Posted by Shagnasty
I am amazed at the number of people that imply that writing something off makes it free or almost free. It doesn't fit the term urban legend that well but urban misconception may be a better term. I swear that businesspeople themselves often make it sound like writing something off gets them something off equal value for free which I always found odd. I can see why people get confused.
Yes. The other expression I hear is 'tax writeoff' which is somewhat clearer, I guess.

So basically it boils down to you not paying income tax on the money you paid for it, then?

(And presumably, if it's a valid input expense, you can get reimbursed for the value-added tax you paid on it, if your jurisdiction operates that way.)
#9
Old 09-07-2007, 03:46 PM
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Quote:
Originally Posted by Shagnasty
I am amazed at the number of people that imply that writing something off makes it free or almost free. It doesn't fit the term urban legend that well but urban misconception may be a better term. I swear that businesspeople themselves often make it sound like writing something off gets them something off equal value for free which I always found odd. I can see why people get confused.
And the kind of "businesspeople" who are constantly falling for MLMs and suchlike are the worst. They're constantly talking about write-offs as if they're an actual source of income.
#10
Old 09-07-2007, 03:52 PM
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Well, in extreme cases, stuff ends up being free for some folks, although not the ones who are actually paying for it.

Part of the reasons that movies never make any profit, even though they bring in tens of millions of dollars is that many thing are "usual business practice" in the movie industry that are indulgent luxuries to ordinary folks. Having the equivalent of a home, servants, and gourmet food served at whim are is simply ordinary perks for some actors, and providing them is a business expense. The many millions of dollars being spent on production costs include a fair amount of champaign and caviar, not to mention linen napkins and table cloths to serve it on, and a fair number of folks to serve it. The list of stuff goes on and on. The money is spent by contracts with companies which have a lot of ongoing business in common, and it is conceivable that some of it, at least in the form of considerations not defined as cash equivalents come back around.

But every cent is counted, and all of it is considered capital requiring finance, which is also considered an expense. So, the studio keeps a whole lot of folks working, without directly supporting their salaries, and every cent is expense. Every thing gained is part of the final product, for accounting purposes. But a lot of it gets paid to folks who are using the same sort of accounting methods, and they might show some fairly small profits themselves, on their final accounting.

When this sort of shenanigans were first developed, half the price of all of it was taxes, so it was really worth more now. It's still worth it, though.

Tris
#11
Old 09-07-2007, 03:52 PM
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Quote:
Originally Posted by Sunspace
Yes. The other expression I hear is 'tax writeoff' which is somewhat clearer, I guess.

So basically it boils down to you not paying income tax on the money you paid for it, then?

(And presumably, if it's a valid input expense, you can get reimbursed for the value-added tax you paid on it, if your jurisdiction operates that way.)
Yup.
#12
Old 09-07-2007, 04:40 PM
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Originally Posted by Mikemike2
Yup.
Bother. I was kinda hoping it was like, "Free Computer!!!" or something. Instead, it's just like doing my taxes. Oh well...
#13
Old 09-08-2007, 12:41 AM
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Originally Posted by robardin
Yes. As Kramer said on Seinfeld, when called on his claim that the US Post Office "just writes off" insurance claims against packages damaged in the mail:

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're the ones writing it off!

It does all make a sort of sense, you see?
Exactly what I was going to post.
#14
Old 09-08-2007, 01:04 AM
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Quote:
Originally Posted by Shagnasty
I am amazed at the number of people that imply that writing something off makes it free or almost free. It doesn't fit the term urban legend that well but urban misconception may be a better term. I swear that businesspeople themselves often make it sound like writing something off gets them something off equal value for free which I always found odd. I can see why people get confused.

A real world example, last month my gross receipts were

Income
Discounts/Refunds Given -74.00
Parts Sales 650.49
Services 5,511.20
Total Income $6,087.69
Expenses
Advertising 200.00
Auto 1,530.50
Bank Charges 35.55
Fuel 249.26
Insurance 200.00
Legal & Professional Fees 182.35
Meals and Entertainment 32.91
Office Expenses 175.37
Parts 1,827.53
Subcontractors 137.95
Taxes & Licenses 694.00
Utilities 397.68
Total Expenses $5,671.58


Net Operating Income $416.11

ok, so last month sucked....actually I was behind on a couple things and got caught up as well as $300 and change in truck registration as well as paid my sales tax. So in a nutshell as far as the IRS is concerned. I only made $416.11 last month.

Although...I am driving a 2006 honda ridgeline, have a smartphone with internet, high speed internet in my shop area, etc. In a nutshell you effectively get all these things at about a 25% discount due to their tax deductibility. So a business owner CAN live a much better lifestyle in some respects, its just not free.

Last edited by drachillix; 09-08-2007 at 01:07 AM.
#15
Old 09-08-2007, 01:11 AM
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Quote:
Originally Posted by drachillix
Although...I am driving a 2006 honda ridgeline, have a smartphone with internet, high speed internet in my shop area, etc. In a nutshell you effectively get all these things at about a 25% discount due to their tax deductibility. So a business owner CAN live a much better lifestyle in some respects, its just not free.
In addition, a few years down the road, I will have no truck payment, lower registration, and probably a cheaper phone. That alone would give me back $1500 last month.

Another thing not mentioned depreciation on computer hardware and such. Getting to deduct a couple thousand a year from my income for loss of value in my truck is a nice treat that a normally employed person does not get.
#16
Old 09-08-2007, 02:15 AM
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Quote:
Originally Posted by drachillix
Although...I am driving a 2006 honda ridgeline, have a smartphone with internet, high speed internet in my shop area, etc. In a nutshell you effectively get all these things at about a 25% discount due to their tax deductibility. So a business owner CAN live a much better lifestyle in some respects, its just not free.
I agree that one of the advantages of a small business is that you can make deductions for things like autos, phones and computers that employeed people usually can't.

But many people don't seem to realize the implication of making purchases after tax. If you get a tax deduction you pay 100% of the cost of the item. If you don't get the deduction - than an example would be to buy an item for $1000 if you were in a 40% tax bracket. You would actually have to earn $1,666 so that you can pay $666 in tax and $1000 for the item

Last edited by Mikemike2; 09-08-2007 at 02:17 AM.
#17
Old 09-08-2007, 03:11 AM
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[QUOTE=drachillix]A real world example, last month my gross receipts were
Total Expenses $5,671.58
Net Operating Income $416.11



I realize this is for just one month, but let's say it's for a full year for a business that you're trying to start up on the side. If you put it all into it's own Schedule C, and show a net loss of $5255.47, you can deduct that ffrom your gross income from your regular job or let it carry over to the next year. Again, it's not like a free refund but it is nice to let Uncle Sugar help you out some as you're trying to put a new thing together.
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