Tax Myth Buster Series: A Tax Write-off Means That the Item Doesn’t Cost the Taxpayer Anything

Tax Myth Buster Series
A Tax Write-off Means That the Item Doesn't Cost the Taxpayer Anything
By Wayne M. Lenell, CPA, PhD

Statement of Tax Myth:

Yes, I bought a new car, probably a lot nicer than I needed, but I'm able to write it off, so . . .

The myth in the statement above implies that, by writing-off a business purchase, it doesn't cost the taxpayer anything. If that were true (but it's not), the government would be paying for all business expenses. The term "write-off' is used in common language. A more accurate term for write-off is "tax deduction."

The truth is that taxpayers receive a tax deduction for legitimate business expenses. A tax deduction lowers taxable income. The Federal government applies a tax based on the level of income ranging from
10% to 37% of taxable income. If, for example, a taxpayer buys an item for $10,000 and is in the highest Federal tax bracket of 37%, the taxpayer would get a reduction of $3,700 in Federal tax than had the taxpayer not purchased, and claimed a tax deduction for, the item. In effect, the Federal government is covering 37% of the cost of the item and the taxpayer has a net cost of $6,300. Taxpayers in lower tax brackets do not enjoy as much Federal assistance in purchasing business items because their tax rates are lower. Someone in the lowest tax bracket of 10% would see a $1,000 reduction in Federal tax on a
$10,000 business purchase.


Although a taxpayer should not purchase an item solely for the tax deduction, there are times when a taxpayer may decide to accelerate or decelerate the purchase of business items. Toward the end of each year, taxpayers will often ask their tax advisors how much money they need to spend before the end of the year. Making business purchases can "smooth out" income tax obligations. For example, if a business is having a high-profit year because of a nonrecurring event, the taxpayer may decide to
purchase items that will be necessary in the next year. In the current year, income is high and so will be
the tax bracket. If the taxpayer believes that the next year will not be as profitable, the taxpayer can shift expenses to the current year by purchasing equipment, supplies, etc. before the end of the year. If the taxpayer is in the 32% tax bracket, the government will "pay" the taxpayer 32% of the expenses via tax deductions in the current year with a higher-than-normal profit. In the next year, the taxpayer may drop to the 24% tax bracket. If the taxpayer waits until the next year to purchase business items, the government will cover 8% less than had the taxpayer purchased those items in the current year.

It is important to note that, to be deductible, the business expense must be legitimately deductible under Federal law. If a tax advisor recommends that a taxpayer spend $10,000 to lower taxable income from the 32% tax bracket to the 24% tax bracket, the taxpayer must spend it on business items, not personal items.

The same concept applies to personal tax deductions such as charitable donation. It is not wise, from a business perspective, to donate money to charity solely for the tax deduction. The fact that the government may cover part of the donation via a tax deduction should be viewed as an added bonus,
not as the primary rationale for making the charitable donation.

Conclusion. While the concept that a tax "write-off" doesn't cost the taxpayer anything is a myth (now busted), it is true that the government, in effect, covers a percentage of the cost of business expenses
through tax deductions against taxable income.