Tax Write-offs

This is one of those terms I have heard thousands of times, yet remains a mystery to me. I suspect that a lot of the people who use it are as unclear as I as to what it actually means. When someone makes a questionable financial decision, he often justifies it by saying that it’s a tax write-off. What exactly does that mean?

A “tax write-off” usually means an expense that the taxpayer can deduct from his or her taxable income, so that he or she is effectively financing the expense with pre-tax dollars. For example, let’s say for the sake of argument that the tax rate is 30 percent. If I buy a new computer for my personal use at home, and it costs $1000, then I must earn $1429 in order to afford it with my after-tax dollars. But if I am self-employed and buying the computer for my business, then I can deduct its cost from my gross income, and pay for it with dollars that do not get taxed. I may therefore be more willing to make the investment in a computer for business use than I would be for personal use.

I was just going to post the same question. In this thread,, Anthracite articulated my feeling exactly:

Yet, I have heard of instances where people or companies intentionally buy a losing proposition just for the tax benefits.

I would like to know how this works as well.

The concept of a “tax write off” usually applies when a venture only appears to lose money because of a noncash expense such as depreciation or amortization. For example, you can buy a house, rent it out, and claim depreciation on it on your tax returns–even though we all know that houses almost never depreciate over time; they appreciate. If the depreciation plus other expenses exceeds the rent you collect, you’ll show a loss every year on the house, even though it’s “cash flow positive”. You can offset the loss against other income. Of course, when you eventually sell the house, you’ll be hit with a capital gain, but that is taxed at a lower rate, and future dollars are worth less than current dollars.