Write-off
Encyclopedia
Income tax
An income tax is a tax levied on the income of individuals or businesses . Various income tax systems exist, with varying degrees of tax incidence. Income taxation can be progressive, proportional, or regressive. When the tax is levied on the income of companies, it is often called a corporate...
statements, it refers to a reduction of taxable income as recognition of certain expenses required to produce the income. Write-off is also used in vehicle insurance
Vehicle insurance
Vehicle insurance is insurance purchased for cars, trucks, motorcycles, and other road vehicles. Its primary use is to provide financial protection against physical damage and/or bodily injury resulting from traffic collisions and against liability that could also arise therefrom...
to describe a vehicle which is cheaper to replace than to repair, sometimes colloquially referred to as being "totaled
Totaled
In motor insurance, a total loss is a situation in which a vehicle is damaged and the cost of repair and salvage would exceed the vehicle's market value...
" (a total loss).
Income tax
In income taxIncome tax
An income tax is a tax levied on the income of individuals or businesses . Various income tax systems exist, with varying degrees of tax incidence. Income taxation can be progressive, proportional, or regressive. When the tax is levied on the income of companies, it is often called a corporate...
calculation, a write-off is the itemized deduction
Itemized deduction
An itemized deduction is an eligible expense that individual taxpayers in the United States can report on their federal income tax returns in order to decrease their taxable income....
of an item's value from one's taxable income. Thus, if a person has a taxable income of $50,000 per year, a $100 telephone for business use would lower the taxable income to $49,900. If that person is in a 25% tax bracket
Tax bracket
Tax brackets are the divisions at which tax rates change in a progressive tax system . Essentially, they are the cutoff values for taxable income — income past a certain point will be taxed at a higher rate.-Example:Imagine that there are three tax brackets: 10%, 20%, and 30%...
, the tax due would be lowered from $7,481 to $7,456. Thus the net cost of the telephone is $75 instead of $100.
More accurately no income taxes would be due on the expense/write off. So the net benefit would still be $25 in reduction to the taxes owed. However 25% of $50,000(taxable income) would be $12,500 and the reduction to $49,900(taxable income) would result in taxes due of $12,475 ($25 less).
Accounting
In business accounting, the term write-off is used to refer to an investment (such as a purchase of salable goods) for which a return on the investment is now impossible or unlikely. The item's potential return is thus canceled and removed from ("written off") the business's balance sheetBalance sheet
In financial accounting, a balance sheet or statement of financial position is a summary of the financial balances of a sole proprietorship, a business partnership or a company. Assets, liabilities and ownership equity are listed as of a specific date, such as the end of its financial year. A...
. Common write-offs in retail include spoiled and damaged goods.
Banking
Similarly, banks write off bad debtBad debt
A bad debt is an amount that is written off by the business as a loss to the business and classified as an expense because the debt owed to the business is unable to be collected, and all reasonable efforts have been exhausted to collect the amount owed...
that is declared noncollectable (such as a loan on a defunct business or a credit card due that is now in default), removing it from their balance sheets.
Negative write-offs
Some institutions such as banks, hospitals, universities, and other large organizations regularly perform negative write-offs, especially when the amount is considered low dollar, e.g. $5.00 at some places or up to $15.00 or more at others.
Writedown
A writedown is an accounting treatment that recognizes the reduced value of an impaired assetImpaired asset
An impaired asset is a condition in which an asset's market value falls below its carrying amount and is not expected to recover. This means that an asset's market valuation is less than the book value of the asset and the future cash flows to be generated from the asset are less than the net...
. The value of an asset may change due to fundamental changes in technology or markets. One example is when one company purchases another and pays more than the net fair value
Fair value
Fair value, also called fair price , is a concept used in accounting and economics, defined as a rational and unbiased estimate of the potential market price of a good, service, or asset, taking into account such objective factors as:* acquisition/production/distribution costs, replacement costs,...
of its assets and liabilities. The excess purchase price is recorded on the buying company's accounts as goodwill
Goodwill (accounting)
Goodwill is an accounting concept meaning the value of an entity over and above the value of its assets. The term was originally used in accounting to express the intangible but quantifiable "prudent value" of an ongoing business beyond its assets, resulting perhaps because the reputation the firm...
. If it becomes apparent that the purchased company no longer has the value recorded in the goodwill account (it can't be resold at the same price), the value in the goodwill asset account is "written down". Rupert Murdoch
Rupert Murdoch
Keith Rupert Murdoch, AC, KSG is an Australian-American business magnate. He is the founder and Chairman and CEO of , the world's second-largest media conglomerate....
's News Corp bought Wall Street Journal publisher Dow Jones at a 60 percent premium in 2007, which News Corp later had to write down by $2.8 billion because of declining ad revenues.
A writedown is sometimes considered synonymous with a write-off. The distinction is that while a write-off is generally completely removed from the balance sheet
Balance sheet
In financial accounting, a balance sheet or statement of financial position is a summary of the financial balances of a sole proprietorship, a business partnership or a company. Assets, liabilities and ownership equity are listed as of a specific date, such as the end of its financial year. A...
, a writedown leaves the asset with a lower value. As an example, one of the consequences of the 2007 subprime crisis at financial institutions was a revaluation under mark to market
Mark to market
Mark-to-market or fair value accounting refers to accounting for the fair value of an asset or liability based on the current market price of the asset or liability, or for similar assets and liabilities, or based on another objectively assessed "fair" value...
rules:
- "Washington Mutual will write down by $150 million the value of $17 billion in loans...":
Diminished value
Diminished Value is the reduction in a vehicle's market value occurring after a vehicleVehicle
A vehicle is a device that is designed or used to transport people or cargo. Most often vehicles are manufactured, such as bicycles, cars, motorcycles, trains, ships, boats, and aircraft....
is wrecked and repaired, otherwise called accelerated depreciation. A reasonable person will not pay the same price for a wrecked, then repaired vehicle
Vehicle
A vehicle is a device that is designed or used to transport people or cargo. Most often vehicles are manufactured, such as bicycles, cars, motorcycles, trains, ships, boats, and aircraft....
, as they will for a vehicle
Vehicle
A vehicle is a device that is designed or used to transport people or cargo. Most often vehicles are manufactured, such as bicycles, cars, motorcycles, trains, ships, boats, and aircraft....
with no prior accident history. Even if the repairs are proper, the vehicle will still lose value. To collect diminished value after a car accident
Car accident
A traffic collision, also known as a traffic accident, motor vehicle collision, motor vehicle accident, car accident, automobile accident, Road Traffic Collision or car crash, occurs when a vehicle collides with another vehicle, pedestrian, animal, road debris, or other stationary obstruction,...
, insurance
Insurance
In law and economics, insurance is a form of risk management primarily used to hedge against the risk of a contingent, uncertain loss. Insurance is defined as the equitable transfer of the risk of a loss, from one entity to another, in exchange for payment. An insurer is a company selling the...
companies usually ask for a diminished value report.
Diminished value in Canada is termed Accelerated Depreciation (Automotive)
Accelerated depreciation (automotive)
Accelerated Depreciation is the lost value a vehicle carries after it’s been repaired from an accident. Accelerated Depreciation is the Canadian term used to describe the similar term in the United States, called diminished value. Although they are describing similar losses, how a person goes...
which is the lost value a vehicle carries after it’s been repaired from an accident. Accelerated Depreciation is the Canadian term used to describe the similar term in the United States, called diminished value. Although they are describing similar losses, how a person goes about reclaiming those losses in either country is a different process. In some states, insurance companies acknowledge diminished value and provide this coverage direct to their consumers. In Canada, in order to recuperate the lost value after an accident, a person needs to retain legal council and order an acceleration depreciation report on their car for the courts use.
See also
- AmortizationAmortizationAmortization is the process of decreasing, or accounting for, an amount over a period. The word comes from Middle English amortisen to kill, alienate in mortmain, from Anglo-French amorteser, alteration of amortir, from Vulgar Latin admortire to kill, from Latin ad- + mort-, mors death.When used...
- DepreciationDepreciationDepreciation refers to two very different but related concepts:# the decrease in value of assets , and# the allocation of the cost of assets to periods in which the assets are used ....
- Depletion
- TotaledTotaledIn motor insurance, a total loss is a situation in which a vehicle is damaged and the cost of repair and salvage would exceed the vehicle's market value...