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The term write-off describes a reduction in an asset's recognized value. In accounting, it recognizes the reduced or zero value of an asset. In income tax statements, it refers to a reduction of taxable income due to expenses required to produce the income. In vehicle insurance, a write-off is a vehicle which is cheaper to replace than to repair.

The term "write-off" or write down has been used frequently in 2007 and 2008 to describe the actions taken by financial services firms in response to the subprime lending crisis. Firms that traded collateralized debt obligations were forced to take losses when borrowers defaulted on the secured debt that was the underlying asset backing the securities. There's a key distinction, however - a write-down decreases the value of an asset in the company's balance sheet, while a write-off completely eliminates the value of the loan from the balance sheet. Many companies during the subprime mortgage crisis had a combination of both write-offs and write-downs.

A write-down is sometimes considered synonymous with a write-off.[1] The distinction is that while a write-off is generally completely removed from the balance sheet, a write-down leaves the asset with a lower value.[2]

Examples of Write-offs

Some common instances of write-offs include:

  • Banking - A bank that lends money considers a loan to be an asset, since it represents future income from loan payments. Sometimes, however the debtor (borrower) can't pay back a loan. For example a borrower who loses her job may not be able to continue to pay her montly mortgage payments. Similarly someone with credit card debt may not have the cash to pay it off nor the income to keep up with the minimum payments. In these situations, a bank will recognize that the value of the asset is now less than originally expected. When the value of the asset decreases, the bank will place a new value for the asset on its balance sheet, and the impairment will count negatively towards that company's earnings.
  • Taxes - When calculating income tax, individuals can write-off an itemized deduction on his or her taxable income. Let's say someone has a taxable income of $100,000 per year, but spent $1,000 on a new laptop used for business purposes. A write-off of the laptop's expense would take this person's taxable income down to $99,000.
  • Accounting - In accounting, write-off refers to an investment for which a Return on investment (ROI) is unlikely, or no longer possible. The return on the investment in this item is "written off" or removed from the company's balance sheet. In the grocery store industry, for example, a company might take a write-off for spoiled ground beef that has passed its due date.

What is a Negative Write-off?

A negative write-off is the opposite of a write-off. That is, it is term used to refer to an overpayment amount that will not be refunded to the individual or organization that has overpaid on a claim. Negative write-offs can sometimes be seen as fraudulant activity because those who overpay a claim or bill are not informed that they have overpaid and are not given any chance to reconcile their overpayment or be refunded.

Some institutions such as banks, hospitals, universities, and other large organizations regularly perform negative write-offs, especially when the amount that is considered low dollar, i.e. $5.00 at some places or up to $15.00 or more at others.[citation needed]


References

  1. Definition: Write-down. Webster's Online Dictionary. Retrieved on 2008-09-08.
  2. Write-down. Investopedia. Retrieved on 2008-09-08.
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