# How Companies Use Write-Offs

![Write Off](https://www.investopedia.com/thmb/W57kZJTWmnK6OuouSJS1FKpFXWo=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/write-off-4186686-c574fff265d64d35a80330a2ae1ccac0.png)

*A write-off reduces taxable income on the income statement. — Investopedia / Joules Garcia*

> **Definition**
>
> A write-off is an accounting entry related to losses incurred by a business.

## What Is a Write-Off?

When a business has unreceived payments, unpaid loans, or lost inventory, it creates an accounting entry known as a write-off to record these losses. A write-off reduces taxable income on a company's income statement.

### Key Takeaways

*   A write-off is an accounting adjustment used to record unpaid debts or recognize a loss in value.
*   Unpaid bank loans, unpaid receivables, and losses on stored inventory are three scenarios that require a business write-off.
*   A write-off reduces taxable income on the income statement.

## Accounting Entries

Businesses use accounting write-offs to account for losses. [Generally Accepted Accounting Principles (GAAP)](https://www.investopedia.com/terms/g/gaap.asp) detail the accounting entries required for a write-off. Two standard business accounting methods for write-offs include the direct write-off method and the allowance method.

Under the direct write-off method, bad debts are expensed. The company credits the accounts receivable account on the balance sheet and debits the bad debt expense account on the income statement. Under the [allowance method](https://www.investopedia.com/terms/a/allowance-for-bad-debt.asp), an uncollectible customer’s debt is written off by removing the amount from accounts receivable. The entries account for scenarios such as:

*   **Bank Loans:** Financial institutions use write-off accounts when they have exhausted all methods of collection action on loans. Write-offs are tracked alongside an institution’s loan loss reserves, a non-cash account that manages expectations for losses on unpaid debts. Loan loss reserves project unpaid debts, while write-offs are the final action.
*   **Receivables:** A business may incur a write-off after a customer defaults on a bill. This will include a debit to an unpaid receivables account as a liability and a credit to accounts receivable on a company's balance sheet.
*   **Inventory:** Write-offs are used to account for inventory that is lost, stolen, spoiled, or obsolete. An expense debit for the value of unusable inventory and a credit action to inventory are noted on the balance sheet. 

## Tax Credits and Deductions

The term write-off loosely explains an action that reduces taxable income. [Deductions, credits, and expenses overall may be referred to as write-offs.](https://www.investopedia.com/tax-write-off-vs-tax-deduction-vs-tax-credit-11679611) Businesses and individuals claim certain deductions that reduce their taxable income.

The Internal Revenue Service allows individuals to claim a [standard deduction](https://www.investopedia.com/terms/s/standarddeduction.asp) on their income tax returns or [itemize deductions](https://www.investopedia.com/terms/i/itemizeddeduction.asp) if they exceed the standard deduction level. Deductions reduce the [adjusted gross income](https://www.investopedia.com/terms/a/agi.asp) applied to a corresponding tax rate. Tax credits apply to taxes owed, lowering the overall tax bill directly.

> **Important**
>
> Corporations and small businesses have a broad range of expenses that reduce taxable profits. An expense write-off increases expenses on an income statement, lowering profit and taxable income.

## Write-Offs vs. Write-Downs

A [write-down](https://www.investopedia.com/terms/w/writedown.asp) is where the book value of an asset is reduced below its [fair market value](https://www.investopedia.com/terms/f/fairmarketvalue.asp). For example, damaged equipment may be written down to a lower value if it is still partially usable, and debt may be written down if the borrower repays a portion of the loan value.

The [difference between a write-off and a write-down](https://www.investopedia.com/ask/answers/070715/what-difference-between-writeoff-and-writedown.asp) is a matter of degree. Where a write-down is a partial reduction of an asset's book value, a write-off indicates that an asset no longer produces or adds to income.

## What Business Expenses Are Considered a Tax Write-Off?

The IRS allows businesses to write off various expenses that reduce taxable profits. Expenses may include office supplies, rent, insurance premiums, and internet or phone bills.

## How Is Profit and Income Affected by a Write-Off?

Businesses use accounting write-offs to account for losses. Write-offs usually involve a debit to an expense account and a credit to the associated asset account. Expenses are also reported on the income statement and deducted from revenues. This means lower profit and taxable income.

## What Are Common Losses That Businesses Write-Off?

Three common scenarios for business write-offs include unpaid bank loans, unpaid receivables, and losses on stored inventory.

## The Bottom Line

Understanding write-offs—and the difference between a tax write-off and a write-down can help reduce taxable income and increase the accuracy of a company's financial situation.

> **Article Sources**
>
> 1.  Internal Revenue Service. "[Topic no. 453, Bad Debt Deduction](https://www.irs.gov/taxtopics/tc453)."
>     
> 2.  Internal Revenue Service. "[Topic No. 501 Should I Itemize?](https://www.irs.gov/taxtopics/tc501)"
>     
> 3.  Internal Revenue Service. "[Credits and Deductions for Individuals](https://www.irs.gov/credits-deductions-for-individuals)."
>     
> 4.  Internal Revenue Service. "[Guide To Business Expense Resources](https://www.irs.gov/forms-pubs/guide-to-business-expense-resources)."