Write-off Totally Explained

Everything about Write-off totally explained

A write-off may refer to either an accounting write-off or an income tax write-off. It is also a term commonly used in vehicle insurance to describe a vehicle which is cheaper to replace than to repair, known in the U.S. as being a totaled car.

Income tax

In income tax calculation, a write-off is the itemized deduction 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, the tax due would be lowered from $12,500 to $12,475. Thus the net cost of the telephone is $75 instead of $100.

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 sheet. Common write-offs in retail include spoiled and damaged goods.

Banking

Similarly, banks write off bad debt that's declared uncollectable (such as a loan on a business that's now defunct), removing it from their balance sheets.

Write-down

Many of the consequences of the subprime crisis at financial institutions are referred to as a "write-down", which is synonymous with a write-off.
While a write-off in banking refers to a bad loan that's declared uncollectable, removing it from its balance sheet, a write-down, according to Investopedia, means: ť Reducing the book value of an asset because it's overvalued compared to the market value.

So while a "write-off" removes the loan from the balance sheet, a "write-down" reduces the value of the loan in the balance sheet. Despite this difference, both terms indicate that the loaned money in question has no chance of being recovered.
For example, on October 6, 2007, The Washington Post wrote: ť "Washington Mutual will write down by $150 million the value of $17 billion in loans..."

Further Information

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