Recently I was talking to a person about managing one’s finances and professional work direction in life and one thing we talked about was the life in running a business. One comment that he made was that it must be so nice to have your own business as you can write off so many things which in hence gives you things for free. I’ve always wondered where this perception comes from as this is not the only person that I have met who believes that is what a write off is. For example, they believe that if I bought say a $200 monitor that I can claim that and somehow literally get $200 back which is as if I got the monitor for free.
In reality, from an income tax point of view, a write-off basically helps to reduce your income level which can make you pay fewer taxes. Just using some fictional numbers here, let’s imagine we made $1000. A person who makes up to $900 would pay 10% in income tax while at a $1000 one would pay 20%. So that means normally I would lose $200 for the year. Now let’s say I bought some equipment for $200. Now when I claim that as an expense, that in hence will drop my $1000 income to $800 which means I get to pay the 10% instead of 20%. So with that example I definitely saved money, but getting it for free is definitely not the case. It doesn’t work exactly like that at times too as it depends on what you buy, so consult with someone in the know first if you are not sure.
Aside from that though, a lot of people start things such as a small home based business as they can then write off a portion of their household expenses such as their electricity bill as it is an essential a part of their home office. Again though, that doesn’t mean you can then get it for free. But, it can be a helpful way to reduce expenses assuming you have a legitimate plan and operation should you choose that route.