Small Business Tips
What is a Tax Write-Off Anyway?
There’s a famous sitcom scene that I reference often — maybe too often, if I’m being honest. It comes from Seinfeld and, in it, Kramer is telling Jerry about how these big companies just write everything off. This prompts Jerry to state that Kramer doesn’t even know what a write-off is. Kramer’s response, “But they do, and they’re the ones writing it off.”
Well, it would seem that, like Kramer and Jerry, the Internet at large also doesn’t really know what a write-off is. I mention this because, this week, a popular streamer/creator by the name of MoistCr1TiKaL has apparently been accused of hosting a cash giveaway for fans as a means of earning a tax write-off. This. Makes. No. Sense.
Although this particular incident may seem silly or irrelevant, the truth is that a lot of people really don’t understand how tax write-offs work. Yet, with the creator and gig economies growing, a greater number of taxpayers really should. So, in honor of this mind-boggling controversy and Tax Day being a mere two weeks ago, I wanted to reiterate what exactly a tax write-off is and how it impacts those with businesses or who are self-employed. Let’s go.
Explaining Tax Write-Offs
What is a write-off?
When people talk about “write-offs,” what they often mean are tax deductions. As you probably know, the federal system taxes residents based on their income. However, there are ways to reduce your total taxable income via deductions.
A common example is business expenses. In most cases, business owners and self-employed individuals can deduct money spent on certain supplies, travel, etc. for the business from their taxable income. In turn, their total tax liability will be smaller. So, for the purposes of simple math, let’s assume a 20% tax rate and no other deduction. If a business owner had $100,000 in income but spent $10,000 on business expenses during the year, they’d have $90,000 in taxable income — and, thus, would owe $18,000 in taxes versus the $20,000 they’d owe otherwise. (Note that this is a gross oversimplification of how our tax code works, but you get the point).
As you can see from this example, writing off the expenses didn’t make them “free.” After all, the business owner spent $10,000 while reducing their tax bill by just $2,000. In other words, write-offs don’t mean gaining reimbursement — it just means deducting that expense from the amount of money you’ll ultimately pay taxes on.
Gig economy and self-employment write-offs
One reason that the topic of write-offs has gained prominence (even if it’s been misunderstood in the process) is thanks to the rise of the gig economy. Self-employed workers, freelancers, independent contractors, and creators may all be eligible for certain business deductions. From more “traditional” deductions such as mileage and home offices to more niche expenses, such as products for reviews and even movie tickets, what you can deduct from your taxes will depend heavily on what you do for a living. On that note, since creators have unique careers, you can only imagine the types of expenses that YouTubers, streamers, influencers, and the like are able to “write-off.”
By the way, if you are a creator, gig worker, self-employed individual, or anything else of the sort, I’d recommend investing in software to keep track of your business expenses. Personally, I’ve used QuickBooks Self-Employed in the past, but there are a growing number of options out there. On top of that, you’ll want to find tax software that will run through other potential deductions you may qualify for.
Personal deductions
Although these tax write-offs are commonly referenced in terms of businesses, there are also a number of personal tax deductions to be claimed. Some popular examples include mortgage interest, charitable donations, and more. With that said, there’s also the Standard Deduction — which is a set amount that taxpayers have the option of accepting. If your itemized deductions end up being less than the Standard Deduction, then it makes more sense to just go with the latter. And, with the Standard Deduction doubling in 2017 and continuing to be adjusted for inflation, a larger number of American taxpayers are now taking the Standard Deduction rather than itemizing.
Why the MoistCr1TiKaL controversy makes no sense
Finally, in case it wasn’t clear by now, let me explain why the narrative that MoistCr1TiKaL gives money to viewers just to earn a tax write-off makes no sense. For one, according to the IRS, gifts to individuals are not deductible. Second, even if the streamer were able to write off these giveaways, it wouldn’t be financially beneficial to him. Put simply, it would be like giving away $1 to “save” 35¢. But, of course, the Internet will get angry about anything.
As dumb as this week’s MoistCr1TiKaL controversy has been (and it truly has been), it brings up an important point about taxes and deductions. Given the growing self-employment movement, understanding business deductions and taxes is more relevant today than ever. Furthermore, with the tax deadline now just around the corner, this dust-up serves as a great reminder that it’s not too late to find bookkeeping and tax prep software that can help you navigate the world of tax deductions, credits, and more.
So, hopefully, you now know once and for all what a write-off really is.
Author
Other Articles by Kyle Burbank
FinTech News
Credit Card News
Frontier Airlines Re-Ups, Expands Partnership with Barclays
Frontier and Barclays have extended their long-standing co-branded credit card partnership. About the Frontier-Barclays Partnership Renewal: This week, Frontier Airlines and Barclays US Consumer Bank announced that they'd reached a long-term renewal deal. In doing so, the companies reaffirmed a commitment to expand the value of the Frontier Airlines World Mastercard as well as the overall Frontier Miles program. The two companies have worked together for more than two decades....
Personal Finance News
