The term tax write-off is another way of saying “tax deduction.” The phrase typically is used to refer to self-employment and small-business–related tax deductions, though occasionally people also use the term write-off to refer to itemized deductions that taxpayers can claim on Schedule A—things like mortgage interest and charitable donations.
Sounds simple, right? But like most things tax-related, the lines can be blurry about what is—and what is not—a legitimate tax write-off, says Bottom Line tax expert Abby Eisenkraft, EA.
Deductible Business Expenses
Determining what is and isn’t a tax write-off is a common source of confusion for self-employed people and small business owners. Some mistakenly believe that any cost that is even vaguely connected to their business can be deducted from their business’ taxable income. Reality: A business expense is a legitimate tax write-off only if it is ordinary, reasonable and necessary…
Ordinary means that the expense is something that businesses of this type commonly purchase. Example: Dog-grooming clippers are an ordinary purchase for a dog-grooming salon…but not for an attorney, even if he brings his dog to his office every day.
Reasonable means the expense is not overly lavish. It’s reasonable for a business owner to take his employees out to dinner every now and then when they work late…but not to drop thousands of dollars on bottle service at a high-end club.
Necessary means the expense is something the business requires to function. A printer is a necessary expense for an office…but a pinball machine is not, even if pinball helps the business owner relax between tasks.
If you’re not certain whether to write off an expense: Imagine yourself sitting in an audit trying to defend the expense as ordinary, reasonable and necessary to an IRS agent. If it doesn’t seem like a winning argument, don’t deduct the purchase.
Warning: The IRS pays particular attention when small business owners deduct travel, meals and gifts. Keep careful records for these expenses, and strictly apply the “ordinary, reasonable and necessary” standard.
When Tax Write-Offs Go Wrong
A few things that business owners sometimes try to write off even though they shouldn’t…
Clothing and grooming
Looking good can be good for one’s career—but appearance-related expenses, such as cosmetics, business attire and hair-stylist bills, usually don’t qualify as write-offs. They’re deductible only when the purchase cannot reasonably be used in everyday life. Example: A uniform usually is deductible, but a business suit is not.
Commuting expenses
A business owner cannot deduct the use of his/her vehicle to drive from home to his principal place of business…but he typically can deduct the use of that vehicle to drive from his principal place of business to a client’s workplace. Warning: Displaying a business’ name on a vehicle does not automatically make all use of that vehicle deductible, even though that vehicle provides advertising.
Excessive rental-property maintenance costs
Expenses related to the upkeep of a rental property owned and rented out by the taxpayer can be written off against the income that property generates—but only to the extent that the property is a rental property. If a property is rented out part of the year but is a private residence for much of the year…or if part of the property is rented out but the rest is for personal use…then only a prorated share of many maintenance expenses likely is deductible.
