What is a Write-Off?

I was recently on a business trip to Puerto Rico, attending a conference and board meeting. One night at the bar after dinner, I was discussing the expense of the trip with someone who was on vacation. She said, “Well, yes, but it’s a write-off for you, because you’re on business.”

And, while she wasn’t necessarily wrong, she also didn’t understand exactly what a “write-off” means. A lot of people get confused about write-offs and think that as long as you can “write it off”, it’s “free”. Business owners make decisions all the time about spending, because they think they can “write it off” and that’s benefiting them. They think of it as not actually spending the money. Or, that they’ll be getting it back in some way.

Here’s the truth. A “write-off” means that you are spending money that you can deduct from your taxable income. So, if you bring in $1,000 in revenue and you have a business expense for $500 that you can write off, you only pay taxes on $500. It does not mean that you got a free $500.

Let’s assume you have a 25% tax rate. If you never spent the $500, you would have paid taxes on $1,000. This means you would end up with $750 in your pocket. Since you spent the $500, you only pay taxes on $500 ($125), which means you end up with $375 in your pocket.

There is no free money in this scenario. If you never spent the $500, you would have had $375 more in your pocket than what you have now that you’ve “written off” the expense.

This is not to say that “write-offs” aren’t a good thing for business owners. And, when you need to spend the money or you choose to spend the money for valid business expenses, write-offs help your tax liability. But, to make a decision to spend money, whether it be on a piece of equipment, a business trip to a conference, or for a new team member, spending that money – getting the “write-off” – still means you’ll have less money than if you didn’t choose to make the purchase.

Don’t get caught up in the business lingo. Before you go “writing things off,” make sure you need to spend the money.