Have you ever come across the term “tax write-off” and wondered what it meant?
A write-off is any valid expense that you can claim on your tax return as a deduction from your taxable income. As there’s often a thin line between which costs are deductible and which ones are not, finding a legitimate write-off is considered one of the trickiest portions of filing taxes.
If you’re understandably confused over how the whole thing works, we’ll cover the fundamentals of how a write-off works and how you can make the most out of it with your growing business.
What Is A Tax Write-Off?
A tax write-off refers to tax deductions that can be claimed from your total revenue. When a tax write-off is subtracted from your gross revenue, this will result in your total taxable income. Having a lower tax bracket can help you legitimately pay fewer taxes—so the more tax write-offs you have, the better.
This term is also used interchangeably with a tax deduction. Moreover, the Australian government has introduced temporary tax depreciation incentives to assist businesses in asset acquisition activities. However, this will depend on the legislation at the time of claiming as well as pre-established eligibility factors.
Eligibility Requirements to Claim a Tax Write-Off
If your total annual turnover is $500 million or above, you are not qualified to apply instant asset write-off on an asset.
However, if you fulfill key eligibility requirements, you can rightfully claim a tax write-off. That said, the thresholds of these eligibility requirements vary depending on the locality and time of issuance.
These are some of the factors that will determine your firm’s eligibility for claiming a tax write-off:
- The aggregated turnover of your company and associated companies
- The purchase date of the asset
- The date when the said asset has been first used
- The cost of the asset in relation to the threshold
How Does a Tax Write-Off Work?
Your country’s taxation office considers your reported income less your tax deductions and credits to determine your tax bracket. Your income will also determine the rate your taxable income will be taxed when you file your tax return. An income range is used to apply a tax bracket.
To illustrate, suppose that your reported income on your tax return is $50,000 and that you’re a US citizen. After the standard deduction of $12,550 in 2021 and $12,950 in 2022 respectively, your adjusted gross income would be $37,450 in 2021 or $37,050 in 2022. Your reported income will be lower thanks to the standard deduction, which will also result in reduced taxable income and a lower tax rate.
If you want to learn more about taxes and write-offs, this article from Westpac about instant asset write-offs is an excellent resource to develop a more complete understanding of the subject matter.
Who Can Claim a Tax Write-Off?
The entities that can claim a tax write-off are individuals, corporations, self-employed individuals, and small businesses. The types of expenses that can be claimed as write-offs will depend on the type of entity claiming it.
- Individual: Can claim tax write-offs in the form of deductions and credits
- Self-employed: Can claim tax write-offs up to 20% depending on your industry
- Small businesses: Can claim tax write-offs depending on business expenses like wages
- Corporations: Consists of current expenses and capital expenses that may be deductible
What Are Some Common Tax Write-Offs?
Now that we know how a write-off works, you may be wondering: what exactly are possible tax deductions that businesses can make?
There are countless possibilities for business deductions, but we’ll touch on some of the more popular write-offs below.
- Standard deduction: A standard deduction is an expense that lowers your taxable income by a predetermined dollar amount.
- Vehicle and travel expenses: You may claim vehicle expenses that you incur when doing your job. Must be kept on record.
- Work-related clothing: Work uniforms like a chef’s hat or outfit with an emblazoned logo of your company are eligible for tax deductions.
- Home office deductions: If you perform your job at home, some expenses of running your home office can be written off and deducted. Electricity, computer, and company phone bills can be written off, according to the ATO.
- Tools and equipment: If you require tools or equipment to do your job, in some cases you can claim a deduction.
- Covid-19 Rapid test kits: Polymerase chain reaction (PCR) test purchases are eligible for a tax-write off.
- Charitable gifts: If your gifts are considered deductible gift recipients (DGRs), you’re eligible for a tax write-off. The gift must comply with specific conditions in order to be considered truly eligible.
- Education and training: If what you’re studying is in line with your current job, and has caused a direct income increase, you may write it off.
- Investments and interest: You can claim deductions of expenses incurred with your interest income, dividends, or investments. The percentage of what you can claim will also depend on whether you’re a single or joint account.
With all that said, it’s ultimately up to your country’s local taxation office to determine whether something is an allowable deduction. If you’re eligible, you can save up to thousands of dollars on your taxes and tax returns.
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