A tax write off is a deduction or credit that a business or individual can claim when filing a tax return. The Internal Revenue Service (IRS) allows a business to deduct its expenses, which it defines as the cost of carrying on a business or trade. Write-offs range from the cost of a home office and office supplies to donations made to qualifying organizations. As of the time of publication, a business expense must be ordinary and necessary to be deductible, according to the IRS. Ordinary expenses are those that are common to your industry; necessary expenses are those that are required for the business to operate.
Document every business expense the firm incurs during its normal operations. Though a firm does not have to prove the validity of each write off or deduction it claims, only the deductions it can support with a receipt or other documentation will stand in the event of an audit. Rental expenses, interest payments, employee compensation and retirement plans are examples of business expenses that qualify for a deduction.
Record the amount of each ordinary and necessary business expense using a computer spreadsheet. Using a computer spreadsheet organizes your data and also enables you to use the program’s formulas to expedite calculations. In addition to recording your expenses, file documentation of each business expense in a safe location, such as a filing cabinet or computer database.
Categorize the business’ expenses as either costs of goods sold or capital expenses. Costs of goods sold include direct and indirect expenses, such as raw materials, freight costs, storage, overhead and labor costs, according to the IRS. Capital expenses include start-up costs and costs for improvement and must be capitalized instead of deducted from a tax return.
Total the business’ expenses for the year. If the business claims an expense in one category, it cannot claim that same expense in another category. Certain expenses, such as those which are capitalized, cannot be claimed as a deduction. The IRS considers capitalized expenses as part of an asset’s long-term value for the company.
Subtract the total of expenses that the business cannot write off from the total of expenses it can write off. Report the sum of all deductions on the IRS forms that the business files, which will vary based upon the way the business is incorporated. Limited liability companies, for example, report business expenses on Form 1040; each form will have unique rules for filing, including what data to report and whether the filer needs to itemize write offs.
- Business taxes can be tricky; if you are unfamiliar with preparing taxes for a business, consider consulting a Certified Public Accountant or other accounting professional to help you calculate a business' tax write offs.
Items you will need
- Business receipts
- Computer spreadsheet
- Tax forms
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