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What Is a Tax Write-Off and How Does it Work?

Linzi Martin

A write-off — also called a tax deduction — is the amount you can subtract from your taxable income. However, these deductions come in many shapes and forms and often depend on your filing status. On top of that, the IRS has a number of restrictions that warrant your attention. With our help, find out exactly how a tax write-off can be beneficial to your tax return.

How does a tax write-off work?

The goal of a tax deduction is quite simple — decrease the amount you owe to the IRS. W-2 workers can lower their taxable income by writing off things like charitable donations, mortgage interest, the Child Tax credit, and other qualifying deductions. They can either take the standard deduction or itemize their expenses. In either case, if your standard deduction turns out more than your itemized deduction, it’s often easier to take the standard. Plus, it will save you a lot of time!

On the other hand, self-employed and business owners can write off almost all business expenses as long as they are ordinary and necessary, pertain directly to the business, and set at a reasonable amount. This includes things like business miles or the cost of using your home as an office. In general, the self-employed have several opportunities to take tax deductions and save big each year.

What can be considered a tax write-off?

Now that you know the premise of a tax write-off, there are so many different kinds to explore. In fact, it often gets confusing for taxpayers, especially if you are a sole proprietor or work independently. For the self-employed, here’s a general guideline of what tax write-offs you can take:

Even though these write-offs give taxpayers more than one way to reduce their taxable income, the IRS does have reporting requirements. Simply put, they need documentation for your spending. To illustrate, you can’t claim a mileage deduction without having a mileage log. Luckily, this is as simple as signing up for a mileage tracking app to record your business miles. No matter how much you qualify for a tax write-off, you won’t avoid IRS scrutiny unless you maintain records of your business expenses.

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Can I write off my personal car?

Well, the answer will depend on your filing status. Since the Tax Cuts and Jobs Act came into effect in 2018, W-2 employees are no longer eligible to claim itemized deductions for vehicle expenses. Instead, employees may receive a mileage reimbursement from their employer for use of their vehicle for business purposes. To clarify, IRS criteria does not require employers to extend this type of reimbursement. Although many companies do it for the sake of simpler bookkeeping and happy employees.

Let’s say you have a team of 30 employees and are obligated to track all vehicle expenses. It would be rather difficult to avoid human error while maintaining receipts and invoices for gas costs and repairs. In other words, it’s a lot easier to offer a mileage reimbursement program with an accountable plan that meets IRS criteria. When you initiate a mileage reimbursement program, all you need to do is keep track of employee mileage so you can properly reimburse them using the standard mileage rate. These days, investing in MileIQ for Teams is the best solution for tracking mileage for companies of every size and kind.

Since regular employees can’t write off their personal vehicles, then who can? You’re in luck if you are self-employed or a business owner. In this case, you may use your personal vehicle for business and deduct car expenses on your tax return. You calculate your write off in two ways: either the standard mileage rate or actual expense method. Keep in mind, the actual expense method requires you to split your vehicle expenses for personal and business needs. You can only write off the business use of your personal car, personal miles do not count.

How does a tax write-off help you?

A tax write-off helps you in a number of ways. But mostly, the main advantage is obvious — financial reward. It’s particularly handy for those who are self-employed or independent contractors, such as construction workers or real estate agents. In these professions, taxes are not being taken out of your paycheck each week in comparison to W-2 employees. As a result, you have to pay self-employment tax as well as income tax. Luckily, write-offs help taxpayers of all kinds lower their taxable income. To miss out on a tax deduction, like mileage tracking, will likely force you to pay more in taxes.

Interested in learning more about mileage tracking? Read our informative post on What is Mileage Tracking? Why Should You Do it For Taxes? to see the real-time advantages to this tax deduction.

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