If you’ve ever watched Seinfeld, you’ll probably recognize this conversation:
Cosmo Kramer:
Jerry, all these big companies… they write off everything.
Jerry:
You don’t even know what a write-off is.
Cosmo Kramer:
Do you?
Jerry:
No, I don’t.
Cosmo Kramer:
But they do. And they’re the ones writing it off.
This comical exchange is often used to poke fun during tax season, but many small business owners struggle with answering these questions about their business tax filings:
- What exactly is a write-off?
- Can businesses really write off everything?
- As a business owner, should you be expensing more?
Here's What a Business Write-Off Actually Is
Simply put, a write-off is an eligible expense your business incurs that you can subtract from your total revenue in order to reduce your taxable income. So if your business brings in $100k in revenue, but you can write-off $15K in eligible expenses, you will only pay taxes on $85k instead of the full $100k.
You hear a lot of advice as a business owner about how you can write-off everything or put nearly every expense through your business.
Unfortunately, it doesn’t work that way.
What Qualifies as a Write-Off (and What Doesn't)?
Business expenses generally need to be ordinary and necessary for your business. In simple terms, an ordinary expense is one that is common and accepted in your particular industry, while a necessary expense is one that is helpful and appropriate for operating your business.
That doesn’t mean every expense you incur can automatically become a business deduction.
There are also expenses that can be part-business and part-personal. A vehicle is a common example. If you use your vehicle for both business and personal purposes, you generally need to separate the business use from personal use and only deduct the portion that qualifies as a business expense.
The important thing to remember is that personal expenses are not business expenses simply because you paid for them with your business account. Using your business account to pay for personal purchases doesn’t magically turn those purchases into deductions. In fact, mixing personal and business expenses can create unnecessary headaches when it comes time to prepare your tax return—or if your records are ever questioned.
What I Recommend to Small Business Owners
I encourage my business clients to keep their business and personal finances as separate as possible. It’s best practice to use your business accounts for legitimate business expenses and your personal accounts for personal expenses.
The goal isn’t to expense everything to save on taxes.
The goal is to make sure you are claiming every legitimate business deduction you are entitled to while maintaining accurate records and keeping personal expenses out of the business.
A good tax strategy isn’t about finding ways to write off your entire life. It’s about understanding the rules and making sure your business gets credit for the expenses it legitimately incurs.
