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Tax write off

What is a Tax Write-Off in Accounting?

If your small business pays an operating expense, chances are you can write-off a percentage of that expense from your taxes. A tax deduction, or tax write-off in accounting is a form of incentive that allows businesses and individuals to deduct that amount from their taxable income, as permitted by your country’s designated revenue agency. 

Here’s how tax write-offs work, and why they should be used for your small business.

What Does Tax Write-Off Mean?

Sp, what is a tax write-off, exactly, and how does a tax write-off work? A tax write-off or deduction, is a business expense that can reduce your taxable income, affecting the calculation of your federal income tax. Your tax rate and tax brackets play a key role in the total amount of your tax write-off, meaning as long as you are paying some tax, a deduction is worth a specific percentage of your return, based on your tax bracket.

Therefore, if for example, your yearly taxable income in a tax year is under R46,000, a deduction is worth about 25%. If your taxable income is between R46,000 to R92,000, the deduction is worth 34%. If your tax bracket is between R92,000 to R142,000, it is worth 42%; anything between R142,000 and R203,000, is 46%; and anything over a taxable income of R203,000, a deduction is worth 50%.

For example, a write-off of an expense for R100 is actually worth anywhere between R25 and R50 to you, depending on your tax bracket.

Tax Credit vs. Tax Deduction

While a deduction is worth a percentage of money based on your taxable income (commonly anywhere between 25% to 50%, however this value may change depending on your country), tax credits are a direct reduction in taxes, Rand-for-Rand. If you were to receive a credit for R100, then the worth of the credit is exactly R100 to you.

What is the Benefit of a Tax Write-Off?

A tax-write off allows individuals and businesses to lower their taxable income. As a tax-payer, a write-off is highly beneficial to you, as it will save you money on your tax bill overall. Small business deductions are a common way that businesses can account for reductions in their revenue due to expenses.

To take full advantage of tax write-offs, it is vital to track and record all business expenses as they occur so you can deduct expenses later. 

What Can be Written-Off as a Business Expense?

Expenses made by a business must be approved by your country’s designated revenue agency to receive a tax deduction. All that is required is that these operating expenses are made for the continued running of the business.

Examples of Tax Write-Offs

Below is a list of examples of small business and self-employed business expenses that can be written off when you pay taxes: 

  • Education and training
  • Vehicle expenses
  • Rent and lease
  • Advertising
  • Legal and accounting fees
  • Employee benefits
  • Health and work insurance
  • Travel expenses for business trip
  • Meals and entertainment for clients or employees
  • Office supplies and postage
  • Home office expenses
  • Capital assets

Stay compliant and avoid penalties by checking your country’s full list of tax deductible business expenses.Individuals can also apply tax write-offs on their personal income tax returns, such as for child care expenses and clean energy expenses. But it is always best to check the validity of these tax deductions with your local tax authorities. 

Vehicle Write-Off Example

As a small business owner, if you use your vehicle for business purposes, then the expenses associated with that vehicle are tax deductible. Such expenses include gas, parking fees and toll charges, repairs and maintenance, even lease payments if you lease a car.

However, you need to be careful when writing-off vehicle expenses for business use, as they are one of the most heavily abused deductions. Federal revenue agencies are very particular about these deductions as a result. Therefore, keeping an accurate logbook, and mileage count of your vehicle to separate personal and business use is paramount.

Small Business Deductions for Capital Assets

A capital asset, also known as a fixed asset, is a tangible asset that will be used by the company for longer than a year to help generate income. Capital or fixed assets for small businesses most typically include property, plant, and equipment.

When it comes to assets and write-offs in accounting, they must be handled differently from expenses. A capital asset can either be written-off when it reaches the end of its life, when it becomes obsolete, or when it is sold off. At the time of its removal from the business, the asset must also be expunged from the business’s balance sheet. Depending on the reason for its removal, depreciation of the asset must also be accounted for.

Using Accounting Software

Purchasing and using accounting software for your business is another tax deductible expense! Self-employed individuals and business owners that use QuickBooks to manage their bookkeeping and other business responsibilities can deduct the software cost on their taxes as it directly helps them run their business. Maximise tax write-offs for your small business with the use of QuickBooks.

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