A write-off in accounting is not the same as a tax write-off. In business accounting, a write-off refers to adjusting your books for accuracy when an asset loses all value. If an asset can’t be liquidated for cash or lacks market value completely, you need to remove that amount from your asset account and potentially list it in an expense account. (Learn more about debiting and crediting your asset and liability accounts in our piece on double-entry bookkeeping.)
Writing off an asset usually happens in the following situations:
- When you can no longer use a fixed asset—for instance, if you own a damaged piece of equipment or machinery that’s reached the end of its warranty or lifespan. If the equipment can’t be fixed or sold, only scrapped, you’ll write off that fixed asset.
- When a client is unable to pay a bill—for instance, if a client with an outstanding invoice has declared bankruptcy and you won’t be able to collect the amount you’re owed. This is called a bad debt write-off, and it requires you to remove the bad debt amount from your accounts receivable.
If an asset doesn’t completely lose its value but decreases substantially in value, it’s referred to as a write-down, not a write-off. And if you’re fairly sure an outstanding invoice might become a bad debt (or if you let customers purchase inventory on credit), you have a doubtful debt rather than a bad debt.
Although bad debt and fixed asset write-offs aren’t the same as tax deductions, the loss of an asset or income does impact your taxes. (In particular, make sure to read through the IRS’s guidelines on bad debt expenses and deductions.) If you need to perform a write-down or write-off, reach out to your accountant for advice. You need to thoroughly document the write-off or write-down to ensure accounting accuracy, both for your business’s bottom line and the IRS.