Can you explain how one goes about "writing-off" something...? I was talking to a guy who works as a contractor and he's talking about how he writes off alot of stuff (i.e. his soon-to-be BMW purchase, etc. etc.).

Then, I heard how he was able to draw into his "own" company (which is really, him) to get the money he needs to buy his fiancee her engagement ring.

And my reaction is: Um, what...? Maybe I should stop being a salaried employee and be a contractor too. Can someone explain how this works...?

 

+1 as Im about to go through this too....

 

When we "write things off", we just save the receipts and give them to our accountant, then they are listed as expenses and deducted from our revenues. So say I have $10,000 in write-offs and $100k in revenues. We only have to report $90k.

That's simplifying it of course. I know for us, we had probably 35 different expense codes. Some people have more, others less... depends on the business. We also "wrote off" the truck we bought. This is fairly standard for any business. The term write-off is also misused, b/c you really aren't writing it off... you're deducting it. If you spend $500 on a laptop, you don't get $500 back from the gov't. You just deduct that $500 from revenues as outlined above. If you buy a $30k car, you can either deduct a percentage of the purchase price, or depreciate it annually for 7 years (which is considered the "life" of a vehicle). I think it's 7 years... but you get the point. Then that annual depreciation becomes an expense and is deducted from revenues. The only issue with that is if you get audited, you need to be able to prove that the vehicle was used for business. For us it was easy b/c we had vinyl all over it, so there was no hiding its use. For him, depending on what type of BMW and what type of business he's in, it may be tougher to prove. If he's in construction and he's buying a BMW 5-series, the auditor likely won't buy it... but they may if it was an X5. And if you don't think small businesses are being audited... think again. Audits are way up... and I know several businesses who get audited. We were also audited last year for one of the stores. Audits are no big deal if you're on the up and up... but if you try to get sneaky, good luck. So get a good accountant and take your deductions, but do them within the tax laws.


As far as drawing on his own company... my guess is that he's basically setup as a company, then he as an individual draws a salary. This is what we did for the stores. I did not take a salary... I would just take draws from the account. I usually did it quarterly. Not gonna say what I took out... but for example, if I took out $10k per quarter I basically paid myself $40k/year. Keep in mind though that this money is taxable as a salary and you have to pay taxes on it. To make sure I didn't get my ass kicked come April 15th, we paid estimated taxes quarterly as well to off-set the draws.

 

Also, I was a contracted employee before I was a business owner. Keep in mind contracted employees have to pay their own taxes, SS, Medicare, etc. You also do not get any benefits like insurance or 401ks, etc. Now, that's not an absolute, you may be able to negotiate that in your contract, but it's not likely.

The upside is that you'll likely get paid a little more for the same job since you are not receiving any of those benefits.

 

Even if you are employed, if you purchase items that you use for work, you can have your accountant write off those expenses as well. My company does not supply us with all the needed tools so I went out to buy tools for work and I was able to write those off. The same would go for miles if you had to travel for work and don't get reimbursed.

 

Thanks, guys. Helps alot...

The guy works in IT and so, when he was yacking about "writing off" the 2007 BMW 328Ci, I was thinking there had to be more to it. So, is he crossing the line because it's a sports luxury coupe...?

 

And another question for juniorbean and/or others: So, when the guy took out the $$$ to get the ring...why did he have to "pay his company back"...? Like, since the company is really him...why is he paying himself back...?

 

Depends on how he uses the car and whether it's "reasonable" in that profession-- in an audit, the IRS may just reduce the amount the guy can claim if he was driving a Lambo as opposed to a BMW (which may be fine) or a Malibu. However, if he took the subway to work most of the time, none of the car will be permitted.

It's OK to be a little aggressive and deduct the expense until the IRS says one cannot.
He was probably using the business credit line rather than his own. He has to pay back the business because the ring is not a business expense-- if he didn't pay the loan back and it's spotted, he gets into all sorts of trouble.

 

^ Thanks, Will...

So, essentially, the gist of "writing-off" something is to reduce the earnings and hence get a lower taxed amount...? That's it...?

 

Good information from jb and Will. If you like, I can add a little more relating to the Canadian perspective.

As jb mentioned, "writing off" a vehicle isn't really an accurate term. Think of it as nothing more than claiming the depreciation of a capital asset, in this instance a vehicle owned by a business, whether it be sole proprietorship or limited company. The vehicle is depreciated by a percentage each year until the value is basically nothing. This is not to say that any vehicle can be claimed. There is a maximum allowed by Revenue Canada. One cannot depreciate the full amount of a $180 000 AM.. And the vehicle needs to registered and used for business use. Even then there are some exceptions. My commercial trucks, for example, need to be of a particular type to obtain the full benefit. I'm not entirely sure what sort of "contractor" your friend is, but he should be aware that the vehicle must subscribe to particular guidelines. If not, he would be further ahead to buy the vehicle for his own use and claim the mileage usage allowance to reduce taxable income.

A popular way to reduce taxable income directly is to lease the vehicle. If the vehicle is indeed used for it's intended business use, then the entire lease payment can be deducted against taxable income. Of course fuel, insurance, repairs and related expenses are deductible. As well as the Canadian GST.

As far as your friend drawing against his company (is it incorporated?), he may be referring to a shareholder's loan repayment. Your friend may have started his company as a sole proprietor and then decided to incorporate. Depending on the business, the Canadian government allows for a $750 000 capital gains exemption. In short, you are not taxed on this amount if you sell your company. Anything over that amount is indeed taxable. There is a creative way, however, to claim the exemption now to reduce your personal tax bill: Start as a sole proprietorship, form a limited company and make yourself the director and fold the original company by selling the assets to the limited or incorporated company. The incorporated company now owes YOU $750 000. All of it tax free because of the capital gains exemption. Depending on what the limited or incorporated company makes, the combined tax is around 15%. Any after-tax income can be paid to you directly without having to claim ANY income personal tax, up to $750.000. You can draw this amount any time you like. Not too many people take advantage of this opportunity, but perhaps your friend was one of them. This may be what he was referring to by taking a draw from his company.


Terry

 

Just to re-iterate on what Terry said about the vehicle... he speaks the truth. Our catering truck was registered and titled under the business name... not our personal names. Had it been listed under us we would not have been able to take the full deductions and personal limits would have been involved. I also would have had to keep track of all of the mileage on the vehicle... writing down every trip and every distance. Having it under the business made it sooooo much easier.


Ahhh... then he did not take a draw like I mentioned we did. He basically just took a loan from the business. Yes, in the end he is really just paying himself back... however, from an accounting standpoint, he took a loan from his company, then repaid it. We did this a few times with the stores... especially in the winter. Both stores did not perform identical, so when there were a few times we borrowed from one store to the other, then paid it back once things picked up again. This was just a way for us to not have to put our own money in, and since it was usually a small amount (a few thousand or so), it was just easier to borrow it for a month or two from one LLC to the other, then just pay it back.

 

Thanks for the write-up, Terry!


Um wow...then, I think someone is either clueless of tax laws or I'm not getting all the information. As far as I know, the guy (and he's not really a friend per se) is buying the car for his fiancee's usage. He already has his own vehicle...!

 

If he registers the car under his name he'll be "ok". Unless she's on the payroll too.

 

Thanks, TRU...

So, the gist of writing off something is to get a tax-break because one is earning "less" overall...He makes it sound like it's free money.

 

No, not sure how you came up with that!

The intent is to account for business expenses and allow them to be deducted from gross revenue prior to determining taxes. Sometimes it is stretched but I think this is the intent.

 

All I could think of when I read this thread....

Jerry : So were going to make the Post Office pay for my new stereo?
Kramer : It's just a write off for them.
Jerry : How is it a write off?
Kramer : They just write it off.
Jerry : Write it off what?
Kramer : Jerry all these big companies they write off everything
Jerry : You don't even know what a write off is.
Kramer : Do you?
Jerry : No. I don't.
Kramer : But they do and they are the ones writing it off.
Jerry : I wish I just had the last twenty seconds of my life back.

 

I think you just said the same thing, but in a different way... the gross revenue amount is reduced by the expenses (which were written off), and the amount taxed is based on this final revenue number... which is smaller than gross revenue prior to write-offs, thus the amount taxed is less, thus it is a "tax break" of sorts.

Disclaimer: I know jack about tax law.

 

Yep...the guy makes it sound like he's getting $30K for free. So, here I was thinking: man, I'm really in the wrong line of business.

 

^ LOL... nope... he's just blowing smoke

 

+1

Sounds like just a typical Edmonton wannabe.




Terry

 

No comment.

I can't wait until he claims he's writing off his Prada suit which I'm sure he'll use for his upcoming wedding...

 

You could just become good friends with him and visit him in jail after the audits.

 

You know...I'm not going to comment on that either.

 

I was a 1099 "contractor" when i had 3 different part time jobs at one point. It definitely had some tax advantages. I was able to write off any clothing, technology and tools that i purchased exclusively for business use. Later, I established a corporation with the state and had all my jobs pay that corporation instead of me. I would then pay myself from the corporation. When i bought my car, i registered it under the corporation so i could write it off (i used the car 90% of the time to do business related things).

Some main points about 1099 income/ incorporating yourself

-If your only source of income is from one company, you cannot technically be a 1099 (independent contractor).
-If you are 1099 it is good practice to put a certain portion of every check into a tax savings account. Many of my friends are 1099 and were struggling to scrape together money at tax time because no money was ever taken from their checks or saved for that purpose
-If you establish a corporation, be sure to draw a good income for yourself every year. If you pay all of your expenses including personal living expenses from the business not only is it illegal but you are not establishing income for yourself. This was an issue for me when i attempted to buy a condo because when i lived with my parents, i barely had any expenses. I only took about $16,000 per year salary (to cover personal living expenses) from my company and when the mortgage company asked for proof of personal income for the prior 2 years, they basically laughed at me, saying there was no way i could afford an $$$$ mortgage payment on $16k. I explained my situation and they told me its a common mistake that incorporated individuals make. I ended up not being able to get the loan, even though i could have afforded the monthly mortgage payment. Now even though i am a W2 employee at my current employer, i take a certain salary from my business every month just so i can prove to the mortgage company later this year that i have steady, reliable cash flows.

I am by no means an expert on this topic. I let my accountant handle the major decisions and tax filings, so there are surely things i may have missed or left out. But, i know that what i just wrote was a basic jist of my understanding....please correct me if i am wrong.

 

There is no "tax break", proper business expenses are non taxable.

 

Just a few corrections. Hey, you asked for it

Again, it's not a write-off. If you spent $500 on clothes, you did not get $500 back from the gov't. What you were getting was a deduction. HUGE difference.


This is wrong as well. I have actually never heard of this. Being an independent contractor has nothing to do with how many companies you are contracted with. It can be 1 or 100. Doesn't matter. If you're a contractor, you're a contractor. In fact, I was an independent 1099 contractor for just about two years (almost of 2005 & all of 2006) and I only worked for one company (and the same company) the entire time.


This is correct, but a better practice is to pay estimated taxes. When I was a contractor I went to my accountant and told them how much I was getting paid.... basically how much my contract was worth annually. We then setup a quarterly estimated tax payment which I sent in when due... and it was based on my contracted salary. I still did what you did and setup two accounts (one for taxes, one for me), then when the quarterly payment came around I just sent a check from the "tax" account. Paying estimated taxes meant that when April 15th came around I either owed nothing or got some money back (since the estimate is prepared without factoring in deductions...and we always have deductions).

 

Thanks for the corrections. Let me clarify a couple of things...

Yeah, i definitely know that. I guess people (ie:myself) pick up bad habits of interchanging the two terms write-off and deduction. Basically, i always think of the deduction as the "write-off" amount...


Again, i am no expert. But when i talked to both my accountant and a guy who is employed by the IRS, he said it is a poor decision to work 1099 if it's your only source of income. HOWEVER, i was not working under an actual written contract, and i was still receiving a check every 2 weeks. I never billed them for my services. Looking back on it, that probably has a LOT to do with it. If someone has an actual contract with the company, i'm sure what you said is exactly right.


Again, yep. I did pay quarterly taxes, and i actually think there is a penalty for not doing so? My main point was just saving the tax money in another account so regardless when you had to pay, it was readily available with no stress...


Again, i'm no expert! Thanks for the input.

 

can u write off toll road expenses?

 

^ Typically you cannot deduct expenses related to your commute. If you were going on a site visit on behalf of the company you are contracted with and happened to need to pay a toll.. then yes. But if it's part of your commute... no.

All of the commuting expenses are factored into your mileage reimbursement. Or, if you deduct your car under the business, it's factored into that deduction.

 

Well, then the guy in question for me here seems to have zero clue about what "writing-off" something is.

I seriously think he believes that if he buys a $30,000 car, he's getting $30,000 back from the government.

 

Nope. He'll either take a $30,000 deduction from his gross income or just depreciate the car over its useful life (believe it's 7 years).

If he's smart he'll depreciate it over the 7 years. If he takes the big $30k in one year, not only will it likely setup a flag, but he blows his whole deduction in one year instead of using it to offset income over 7 years...

 

^ Thanks, JB...can you explain the depreciating process? How does it work?

 

^Now, I'm not an accountant, but the way I understand it in simple terms is: Say the car is $30k. You take $30k, divide it by 7 years and take that number as your depreciation each year.

So, $30k car divided by 7 is $4,285.71. So each year you would take a $4,285.71 deduction. It may be slightly higher as there is a formula that is used, but that's the simple way to explain it. You can also deduct any expenses you put into the car (gas, repairs, etc.). You cannot deduct miles when you do it this way.

 

Got it. Thanks!
So, when you deduct things like gas and repairs...it is again, just a deduction and not total compensation from the gov't, right?

So, if the gas cost $2000 for the year, you're not getting $2000 from the government but rather, it is a $2K deduction from the earnings?

 

Correct-- the deduction is taken at the end of the tax year to reduce taxable earnings.

 

And another question: If you deduct say, a $30K purchase this year, you can't deduct anything again next year?

And unless the person gets audited he could in theory keep buying himself high-end cars and write it off...?

 

^ Right. If you buy a $30k car this year and deduct the full amount, you can only deduct that car once. If you buy another car under the business, you can deduct that too.

Problem is, the more large deduction you have, the more the flags may be raised. I also doubt they'd let you deduct more then one car at a time for such a small operation. If he makes $60k a year, one $30k deduction is going to be a dangerous thing to do... nevermind two cars in one year...

 

Your friend doesn't seem to be aware of Canadian tax laws.

Good info by jb, but the Canadian experience is a little different. It changes from year to year, but we'll use last years figures.

$30 000 new-claim 15% first year, or about $4500 to reduce overall business income.

Remaining value at second year thus $25 500 (30 000-4500)-claim 30%, or $7650.

Remaining value at third year thus $17850 (25 500-7650)-claim 30%, or $5355.

Remaining value forth year thus $12495 (17850-5355)-claim 30%, or $3748.50.


And so it goes until the value is depreciated to nothing. No more tax deductions for said vehicle.

Remove car from business and give to ungrateful child. Take car back and give to grateful employee.



Terry

 

^ Yeah, I don't know Canada's regulations. I barely know the US'... that's why we have an accountant.

Thanks Terry

 

Not really a friend per se...more an acquaintance. But, his comments just make it seem like he is getting full value back from the government for everything.

"Yep, if my sewage is backed up...I write it off."