What is a Write-off?

There is a famous scene in the sitcom Seinfeld where Kramer insists that big companies just “write it off” and when asked what that means, he admits he does not know. He just knows they are the ones writing it off.

This creates a dangerous myth for new entrepreneurs. A write-off is not a magic wand that makes expenses disappear. It is a specific accounting action.

A write-off is the reduction of the recognized value of an asset to zero. It occurs when an asset can no longer be converted into cash, has no market value, or is no longer useful to the business. In accounting terms, you are moving a value from the balance sheet (an asset) to the income statement (an expense or loss).

Founders often confuse a business expense with a write-off. When people say “it is a write-off,” they usually mean the expense is tax-deductible.

Here is the math you need to know. If you spend 100 dollars on a business dinner, you do not get 100 dollars back from the government. You simply lower your taxable income by 100 dollars.

If your corporate tax rate is 21 percent, spending that 100 dollars saves you 21 dollars in taxes. You are still out 79 dollars. Never spend money solely for the sake of a tax deduction. That is spending a dollar to save a quarter.

These terms are similar but distinct. They describe the severity of the loss in value.

A Write-down happens when an asset has lost some value but still has worth. For example, if you bought a server for 10,000 dollars and it is now technically outdated but still functional, you might reduce its book value to 2,000 dollars.

A Write-off happens when the value is gone completely. The server caught fire and is now a melted lump of plastic. The value is zero. You remove it from the books entirely.

For B2B startups, the most painful write-off is often bad debt.

Imagine you act as a service agency. You do 50,000 dollars of work for a client. You invoice them. You record 50,000 dollars in revenue. But then the client goes bankrupt and never pays.

You cannot keep that 50,000 dollars listed as an asset (Accounts Receivable) because you will never collect it. You must write it off. This reverses the revenue and hurts your profitability. It serves as a harsh lesson in vetting client creditworthiness.

Product startups face a different risk. You might manufacture 5,000 units of your Version 1.0 gadget. It sells slowly. Suddenly, you release Version 2.0.

Nobody wants Version 1.0 anymore. You cannot sell them. You cannot return them. They are sitting in a warehouse costing you storage fees. You have to write off that inventory. This moves the cost of those goods from an asset to a loss, directly impacting your bottom line.

There is one final context for this term. If a Venture Capitalist invests in your company and you fail, they write off the investment.

This means they mark the value of their shares in your company to zero. While this is a tax loss for them, it is the end of the road for the company. Founders need to understand that while write-offs are a normal part of accounting, excessive write-offs signal poor asset management to future investors.