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"Write-Offs" are not free money!

"Just buy [an $800 smartphone]. It's a write-off." - A family member.

I'm sure nearly every Seinfeld fan remembers the scene when Kramer attempts to get Jerry an indirect refund on a busted stereo system through mail insurance fraud. Kramer justifies the action by saying, "it's a write-off!"

Neither Kramer nor Jerry know what a write-off is.

People refer to "write-offs" in two ways:

1. The formal/correct way: Reducing the value of an asset that you own (here's a detailed definition). Some examples:

  • Customers who owe you money and disappear.

  • A business vehicle that suddenly gets totaled.

  • A few years after a large business acquires a smaller business, the large business determines the smaller business is not providing a sufficient return. A historical example is Microsoft writing down the value of Nokia by $7.6 billion in 2015.

2. The informal way: An extravagant purchase that may or may not relate to normal business operations. Some examples:

  • Buying a $100,000 "corporate" airplane.

  • Acquiring a beautiful art display for "office" decorations for $75,000.

  • Purchasing 15 gaming laptops for "business" purposes at $3,500/computer.

Even if the purchaser can make a valid case to the tax authorities that these are legitimate business expenses, they miss the bigger point: Money is still leaving their bank account.

For example, for the previously mentioned $100,000 airplane, the purchaser must write a check for $100,000. Most would think that the purchaser could reduce his/her taxable income by that amount; HOWEVER, since the airplane was purchase for over $1,000, it is subject to depreciation laws. This means the tax benefit is spread across multiple years (at smaller amounts) instead of immediately.

Thanks to recent tax law changes, the business could realize the full tax benefit for that purchase in the first year. The US Corporate tax rate is 21%, the business would realize a $21,000 tax saving (21% * $100,000). However, the purchase would still have an overall bank balance reduction of $79,000 ($100,000 - $21,000).

A far worse example is a company or school district with its employees paying "out-of-pocket" for supplies without reimbursement. They will pitch the program to subordinates as a tax benefit to their employees using the "write-off" justification. However, if those purchases do not push a person's tax deductions past the standard deduction, there is no tax benefit for that purchase. And, it is worth repeating, the government will not fully reimburse you for those out-of-pocket purchases.

The next time someone tells you to buy something you don't need and uses the "write-off" justification, remember that money is still leaving your bank account.

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