Understanding the “accounting” world and what does it mean to your business.
reading time: 01:13 minutes
As a bookkeeper, the question I hear more often is “can I write this off?” (And no, you sheets are not a “write off”)
In reality, it all depends. Some expenses are known as tax deductions – such as advertising.
A tax write-off is the same as a tax deduction. It means an amount of money you can reduce from your taxable income (AGI – Adjusted Gross Income).
In good ol’ English, it “makes” your income lower, so it can fall into a lower tax bracket.
A tax credit, in other hand, lower the amount you owe in taxes.
A $100.00 tax deduction will reduce $100.00 from your taxable income. If your TI was $50,000, now it will be $49,900. It can help you move to a lower tax bracket. But spending $100 in your business doesn’t mean that you will pay $100 less in taxes.
A tax credit, are “program-based”, not “expense based”. Examples of Tax Credit are Child Credit and The Premium Tax Credit. You’re eligible for this credit if: you earn up to a certain amount and purchased healthcare through the marketplace (more information here).
So an $100 tax credit will reduce your tax liability – eg what you owe in taxes – in $100. If you owe $1000, you will now owe $900.
An expense is tax deductible if it’s considered necessary and ordinary.
Understanding what is “necessary” and “ordinary” in your business is an art. The needs of a real state agency is different than the needs for an artist.
By partnering with a professional that understands your industry will help you in the long run. It will help you with tax strategy and business strategy.