What does it mean to me?
A frequently heard, but rarely understood, phrase is “I’ll just write it off.” But what does that mean? And how do you do it? Can I do it? The nuts and bolts of the process of writing something off lie in the accounting realm: In the Income Statement.
The Income Statement is one of the 3 main financial statements used in business. The basic formula is Revenue – Expenses = Net Income (Loss). The basic understanding of tax is that you are only taxed on income and not on your losses. This makes logical sense.
(Let’s keep the numbers small. You can add zeros to each number if you’d like to see the example as it would pertain to a large business)
Example: Your business earns $10 per month, or $120 per year ($10 x 12mths), and you buy a new computer for $120. What does your income statement look like?
Net Income $0
Income tax (0)
But what would happen if you had a computer sale priced at $50 with an original ticket price of $120? You would get a good deal at the store, but be dinged for taxes on your income statement. Your calculation would be 120 – 50 = 70 net income + taxes on $70.
How Do I “write it off” on my Taxes?
On your T1 (Canada) or 1040 (US), you will have a separate form for your income statement. The line that your tax will be based upon is the final Net Income (Loss). If you manage to break even (Net Income is $0), it will have no tax impact whatsoever. If you have a profit, your final amount owing on your taxes will be increased by that tax of this dollar amount. If you have a loss, your final amount owing on your taxes will decrease.
When will I get a refund?
Refunds are given when the eligible tax deductions exceed the taxable income. If you pay in more income tax throughout the year than is necessary, you will get a refund (assuming you have no tax debts from prior years)
There are large volumes of information, rules, clauses and cases to help you in any tax situation. Writing anything off is easy, but the CRA (Canada) or IRS (US) can audit and challenge anything you claim, so keep it honest. KEEP ALL RECEIPTS as you may be asked for them sometime within the next 6 years.
I am a tax professional, and this article is representative of the prevailing regulations in Canada at the time this article was published. While I am a professional, you are not my client, and so this should not be considered professional advice. Remember, though, that these rules can vary widely by jurisdiction, and that from year to year tax rules can change. Therefore, you should always research whether or not you are eligible for these or other deductions/credits. When in doubt, consult a local tax professional.