Wise Startup Blog

What is “writing off”? Why is it so valuable for startups to be able to “write off” their costs? What costs can be “written off”? These were just some of the questions facing me prior to me beginning my startup life and learning the hard way what exactly is entailed in writing off costs and starting a business.

Like all things, you learn best by experience, but often times you don’t have the time, patience or money to learn things that are extremely important to your business, and write-offs and write-downs are one of those issues, so let’s address the basic questions surrounding business expenses for you startup newbies.

What is Writing Off?

Writing off, is essentially putting any expense that is on business purposes under the company’s expense column.

What exactly does this mean? Say you take you take a client out for business, and you pay for the lunch as part of the sales & marketing of your new client. The entire cost of the lunch you are “writing off”. By writing it off, you are saying it’s a cost of doing business, and thus should be deducted from your overall revenue.

At the end of the year, when you have to pay taxes, you will take the total amount of revenue you earned, and then subtract any “written off” expenses as well as any other costs you have, and arrive at a net income, which you will then pay tax on.

Why is a Write-Off So Valuable to Startups?

In business, especially in startups, cash flow is king. Any time you can preserve cash and not have to pay it off, you’re winning. So when it comes to tax season, the more expenses you can consider “write offs”, the better.

When it comes to tax season, the more expenses you can reduce from your overall net income, the less amount of tax you have to pay. So your goal should be to “write off” everything you can and turn as many expenses as you can into business expenses to save your startup as much money and preserve cash flow as best as possible.

What Costs Can Be Written Off?

There are a number of business expenses that can be legitimately written off, and you should definitely do everything in your power to spend your money wisely and save yourself from taxes.

So you’re probably thinking, well isn’t everything a business spends its money on a write-off? Unfortunately not, and that’s an easy way to get in a lot of trouble with the feds. Say you’re buying groceries for yourself with the corporate card. Yes, you do work for the company, and you make sometimes work from home, but that doesn’t necessarily mean the groceries are a justified work expense.

Write offs should be contained only to items that are related to the operation of your business. Some issues that cross fuzzy lines are buying companies gifts, taking them out to the movies, and even buying them groceries, but with the likes of Microsoft, Google, and even Grooveshark paving the way into extended employee benefits, we’re seeing more and more business expenses being written off.

Please share your business write-off tips in the comments and let us know how you help your startup save vital cash flow.