What is a Write Off | Lower Your Taxes as a Freelancer
What is a Write Off? | A Simple Explanation
You may hear different write-off definitions from different sources, but when speaking about freelancers and small businesses, what is a write off exactly? They are simply purchases you make that are required and appropriate to operate your business or practice. These purchases can be claimed to reduce your taxable income. Tax write-offs generally refer to things that you can deduct as expenses. You might be wondering still: what does that mean?
quick primer on write-offs
Understanding write-offs
Imagine the simplest business–you set up a lemonade stand on your sidewalk. To build the stand, you bought some wood, nails and other materials. To make the lemonade, you bought lemons and also a container to put the juice in.
Altogether, it cost you $100 for your lemons, materials, and supplies. This $100 can be deducted against any income that you make from selling lemonade from the lemonade stand! That’s what a write-off is. It’s also, at times, simply known as an expense.
These write-offs are in addition to anything you might already have as standard, such as the standard deduction.
How does a tax write-off work?
You might be thinking: well, how do I ACTUALLY deduct this $100? What happens?
The reality is, you don’t actually have to DO anything per se. You just go about your usual business spending, this $100 will basically show up as part of a summary line item when you ultimately file your taxes, either as an individual, or as a business.
You’re responsible for keeping an accurate record of what this $100 expense is, and also claiming this expense when you do your taxes. Basically you’ll be typing/writing in this $100 number on your tax forms.
Let’s say you made $500 from your lemonade stand–if you’re an individual and filing Form 1040, you will indicate $500 of gross income from your business, minus $100 of expenses, which means you will report “taxable” income of $400.
These details will be outlined in Schedule C. Don’t worry, you won’t have to manage these forms individually, or know which ones you have to use. Generally, if you use a tax software to do your taxes, you’ll be asked a series of questions that will automatically help you generate each form that you need to use. For example, TurboTax would ask something like “Did you generate additional income from non W-2 sources during the year?”, in which case you would answer “yes” and the wizard would take you to fill out a Schedule C.
Let’s illustrate some other tax write-off examples:
Tax Write-off Examples:
Don’t forget our lemonade example above! For the sake of this blog, we will highlight some common examples for freelancers specifically.
Tax Deductions for Freelance Photographer:
You’re starting out as a freelance photographer and need to set up your studio space. With that comes some hefty price tags for photo equipment like lighting, tripods, backdrops, camera, etc.
You can deduct these expenses from your income. Here are some numbers:
Camera: $500
Lenses: $500
Tripods and stands: $200
Lighting: $300
Software (like Adobe): $500 a year
Total: $2,000
If you make $35,000 that year, you can deduct $2,000 worth of expenses, which means your taxable income will only be $33,000 instead. This effectively means that you don’t get taxed on $2,000 of money you received.
Tax Deductions for Drivers:
If you drive for Uber, Lyft, Instacart, Doordash, etc. you have a number of expenses you can claim and deduct against your income. Here are the most common ones:
Standard mileage deduction–deduct $0.585 per mile driven for strictly business. To and from home DOES NOT COUNT
Car accessories/tools
Car washes
Tolls and parking
Phone bill/upgrades for business purposes
Tax Deductions for Designers, Editors, Videographers:
Here are some common deductions:
Home office deduction–deduct the % portion of your home dedicated to business. For example, you use 20% of your apartment for strictly work, deduct 20% of your rent
You meet existing or potential clients for coffee–deduct 50% of the cost of meals/food
You travel to a conference to educate yourself or network–deduct 100% of the travel and lodging expenses
You spend money to advertise or generate leads for your business to acquire clients–deduct 100% of the cost
What are some expenses that are non-deductible?
Let’s address some expenses that are non-deductible, or are only partially deductible, or have certain restrictions:
Car deductions–per the IRS, individuals who use their cars for business can elect to deduct their car expenses one of two methods:
The standard mileage deduction–Now increased, deduct a flat $0.625 per mile driven for business
The actual cost method–deduct your actual expenses like car payments, gas, insurance, but only the portion for business
For most individuals, we recommend using the standard mileage deduction. This method is way simpler to follow, and in fact, most individuals would probably get a larger deduction. The actual cost method means you can deduct items like the car payment itself, insurance, gas. However, you have to keep records of the transactions and the IRS can be very strict about what you can deduct. In the end, you may not even get a larger deduction than just using the standard mileage rate.
Meals and Entertainment–meals and entertainment for existing and prospective clients can only be expensed at a 50% rate. Meaning if you pay for dinner with a client and spend $100, you can only deduct $50 of it. For the years 2021 and 2022, there’s now an exception which allows businesses to deduct 100% of eligible meals and entertainment.
Home office deduction–you should only deduct the portion of your home you use strictly for business. For example, if you have a small office room, and it’s about 20% of the total square footage of your home, you can deduct 20% of what you pay for your home.
Let’s talk about some more unconventional definitions and interpretations of write-offs.
What is a Write-off in Accounting?
In Generally Accepted Accounting Principles (GAAP), there are more ways to interpret and make a write-off. If your business is a bit more complex and you have certain assets, there are different ways to make write-offs. One example of an asset is called Accounts Receivable–simply, it’s what customers have yet to pay you. This asset exists because not all business transactions happen instantaneously. In the everyday B2B world, many services or products are provided and payment is not received until 30 days later.
If your client decides not to honor their payment terms and they do not pay, you can make a write-off entry for your accounts receivable. Essentially, you would be “canceling” the income that you should have received from the client.
Similarly, you may have a business that has inventory which is just finished goods you have yet to sell. In certain instances, your inventory may spoil, get lost, get damaged, which makes it unable to be sold. In these instances, you would make a write-off entry against inventory to incur an expense.
What is a Write-Off | In Summary
In most everyday conversations, a write-off is generally something that can be used to reduce your taxable income. For freelancers, it’s anything that was purchased or paid for to help you operate your business. It is also commonly referred to as tax deductions, or expenses.
For more complex businesses and corporations, write-offs can include certain entries that reduce an asset’s value due to unforeseen events.
FAQs:
What is a write-off and how does it work?
A write-off is an expense that you can use to reduce your taxable income. These expenses can be mostly anything required to operate your business or practice. Generally, freelancers, business owners and corporations claim a variety of deductions.
What is considered a write-off?
A write-off can be mostly anything that is required and appropriate to operate a business or practice. It is used to reduce the taxable income. Example: the cost of a camera for a freelance photographer can qualify as a write-off/expense.
What is the purpose of a write-off?
The purpose of a write-off is to reduce taxable income so that the individual or business pays less in taxes. Generally, anything that is required and appropriate to operate a business or practice can be claimed as an expense. Check with the IRS to determine eligibility.
