Write-Offs, Write-Downs, Pretax Charges: What’s the Difference?

Merrill Lynch & Co. took a $2.2 billion “pretax charge” Wednesday against its fourth-quarter profit to help pay for 9,000 job cuts. What does that mean?

Firing people costs money—mostly in severance packages but also in real-estate costs, such as when leases are broken. Firms deduct all of that cost immediately to limit all the bad news to one financial quarter. That way shareholders have to endure only one money-losing quarter instead of several.

Merrill Lynch’s job cuts will cost the company $2.2 billion. But the company will save $500 million in taxes by deducting the $2.2 billion from its profits. That reduces the post-tax cost of the job cuts to $1.7 billion.

Today’s Wall Street Journal reports that Ford Motor Co.’s restructuring plan “could call for write-downs of as much as $4 billion after taxes.” How does a “pretax charge” differ from a “write-down” or a “write-off”? A write-down takes place when a company’s assets have decreased in value. A write-off occurs when a company reduces the value of an asset to zero. Write-offs and write-downs don’t involve cash—they’re strictly bookkeeping exercises. But they do reduce earnings and therefore reduce taxes.

Next question?

Explainer thanks Campbell R. Harvey of DukeUniversity and this MSN Money glossary.