What exactly are tax write offs either for personal or business uses?
It’s just a deduction from your gross income, which lowers the amount of taxes you owe, whether it’s business or personal. For a simplified example, say you made $100,000 this year, and paid $10,000 in mortgage interest, you can deduct that 10k from the 100k and only pay taxes on that 90k left over. For businesses, it’s the same principle, just different rules on what is allowed.
You can declare to the IRS that some of your income should not be taxed.
Basically, the government, instead of funding things, will say “if private people/businesses fund this thing, we won’t tax that money” as a way to incentivize people to do certain things. Buying a house, having children, installing renewable energy, etc.
I have a home mortgage, and tax law says I can deduct the money I spend on the interest on that mortgage.
So if I make $100k in a year, and I’ve paid $10k in interest on my mortgage, I will only get taxed on $90k of my income (this is really dumbed down, and there’s more complexity, but this is more or less what it is).
So it’s not “free money.” It’s more like a discount. If you’re being taxed at 30%, spending money on something deductible is like getting a 30% discount on it.
In a business, any expenses that you spend to do business (like office supplies, salary for employees) is also a tax write-off.
My business Makes $10,000 in revenue and incurs $8,000 in expenses over the course of the year
I am taxed based on the $2,000 profit. However, let’s say I took a vacation to Hawaii for a “business conference” That cost me $1,000. I could say that the travel was for the conference and as such is a business expense. Therefore I can add that $1,000 to my annual expenses and now I am only making a “profit” of $1,000 and am taxed accordingly.
For a business, all expenses associated with running the business are deducted from revenue to determine taxable profits. Office rent and utilities, employee salaries and benefits, wholesale cost of goods sold, marketing spend, business travel, etc. People with their own businesses may try to buy items for personal or dual use and “write it off” as a business expense, which means buying it with business funds and deducting it from their profits vs. buying it with personal income that gets taxed first. Say a web designer wants a new MacBook for personal use, and sure they may occasionally do client work or communication on it, but it’s primarily their personal laptop. But they buy it with their company credit card, deduct the cost from their income, reducing taxes their company owes. And they don’t have to buy it with post-tax income.
Tax write offs are expenses that you can subtract from your taxable income – they affect how much of your income is taxed. These are expenses that lawmakers decided should not be taxed for a variety of different reasons – because they are viewed as necessities, are a type of spending lawmakers want to encourage, etc. If I earn $100 but spend $20 on tax deductible expenses, I only have to pay tax on $80. Many business deductions are a cost associated with doing business – like advertising costs, or money spent traveling to see clients. Common personal deductions are for mortgage interest or charitable contributions. People often confuse write offs with tax credits. A tax credit is an amount subtracted from the taxes you owe. Common examples are the electric car tax credit and the earned income credit. In my example, if I’m being taxed on $80 of income at a rate of 10%, I would owe $8 in taxes. If I’m eligible for a $2 tax credit, I only have to pay $6 in taxes.