When taking tax write-offs, what are the main ones every small-business owner should consider?

Professor’s Perspective

Here’s a second reason for engaging a competent accountant for taxes. I think of the term “tax write-offs” as covering at least three different types of items.

One type of “write-off” is an expense — an actual expense incurred — that is deductible. Knowing what is deductible and what is not is important. Among the deductible expenses, there are special recordkeeping requirements for some items: auto expenses, travel, entertainment and business meals are four that come immediately to mind. A business owner needs advice here about what needs to be documented and when and how to do that.

Another type of “write-off” relates to what one would consider a capital expense because in most cases, the cost of a capital investment (a building, for example, or equipment) has to be recovered over a period of years, through depreciation. Depreciation is dreadfully complicated, but there are incentives built into the Internal Revenue Code to promote investment — immediate expensing of the cost of some equipment is the big one here.

The third type of “write-off” is tax credits. To promote investments of certain types, Congress has peppered the tax law with special credits — a percentage of the cost of particular items is a dollar-for-dollar reduction in the tax liability. Some of these are rather permanent features of the tax law, and some come and go as Congress acts or fails to act. Investments in hybrid vehicles, plug-in vehicles, solar or wind power energy, and expenses in making the business premises handicap-accessible are just a handful that come to mind.

Special thanks to Eli C. Bortman, lecturer in law at Babson College.

Professor’s Profile:

Eli C. Bortman

Lecturer in law