Legal Definitions - tax write-off

A tax write-off refers to an allowable reduction in a person's or company's taxable income. By subtracting certain approved expenses, losses, or the declining value of assets (known as depreciation) from their gross income, taxpayers can lower the amount of income subject to tax, thereby reducing their overall tax liability.

Here are some examples illustrating how tax write-offs work:

• Business Expenses: Imagine a freelance photographer who purchases new camera equipment, editing software, and pays for a professional website hosting service, all specifically for their business. These are considered legitimate business expenses. The photographer can write off the cost of this equipment, software, and hosting. This means they can deduct these amounts from their gross business income when calculating their taxable profit, which ultimately reduces the income on which they pay taxes.

• Depreciation of an Asset: Consider a small construction company that buys a new excavator for $150,000. Instead of deducting the entire $150,000 in the year of purchase, tax laws often allow the company to write off a portion of the excavator's value each year over its estimated useful life (e.g., seven years). This annual deduction, called depreciation, accounts for the machine's wear and tear and its decreasing value. Each year, this depreciation expense reduces the company's taxable income, reflecting the asset's declining economic value.

• Charitable Contributions: Suppose an individual donates $2,000 to a qualified non-profit organization, such as a local food bank or an accredited university. Depending on their tax filing status and other deductions, this individual may be able to write off a portion or all of this charitable contribution. This means the $2,000 donation can be subtracted from their adjusted gross income, lowering the total income on which their income tax is calculated and potentially reducing the amount of tax they owe.