How do I write off bad debt from an unpaid invoice?
How to write off bad debt from an unpaid invoice
Short answer
Set up a bad debt expense account in your chart of accounts, create a credit memo against the unpaid invoice for the full uncollectible amount, apply the credit memo to close out the invoice, and recognize the loss as a bad debt expense in the current period. Most accounting software handles this in 4-5 clicks, and the IRS allows the deduction in the year you determine the debt is uncollectible.
Bad debt write-offs are legitimate, deductible, and standard practice. The challenge for most small businesses is not the accounting mechanics — those are well-documented in every major accounting platform — but the timing decision: when is an invoice actually uncollectible versus just slow?
The IRS allows you to deduct a bad debt in the year you determine it is uncollectible. The standard test is whether you have made reasonable efforts to collect and the customer has either disappeared, refused to pay, or filed for bankruptcy. There is no rigid time threshold; the determination is based on the facts of the specific account.
Mechanically, the process in QuickBooks Online: create a 'Bad Debt' expense account in your chart of accounts (one-time setup), create a credit memo against the customer for the unpaid amount, apply the credit memo to close out the invoice, and the loss flows through to the bad debt expense in the current period. Xero, FreshBooks, Square, and Zoho Books all have similar workflows with minor naming differences.
The bigger decision is timing. Writing off too early loses recovery you would have made; writing off too late distorts your aging report and your tax situation. The reasonable threshold for most service businesses is 180-365 days past due with documented collection attempts. Anything younger than that has a meaningful recovery probability; anything older is usually unrecoverable but should be paired with a reasonable-effort paper trail before the write-off.
Tax treatment depends on your accounting method. Cash-basis businesses generally cannot deduct bad debt because the income was never recognized — you cannot write off money you never reported as earned. Accrual-basis businesses recognized the income when the invoice was issued, so the write-off is a real deduction in the period the debt becomes uncollectible.
Write-offs do not extinguish the underlying debt. The customer still owes the money legally; you have only marked it as uncollectible for accounting purposes. If they later pay, you record the recovery as bad-debt-recovery income. Some businesses keep written-off invoices in a long-tail recovery queue for exactly this reason — occasional voluntary payments come in years later, especially when the customer's circumstances change.
The honest framing: most businesses write off too late and recover too little. Tightening the recovery cycle on the front end (day-3 calls, three-attempt cap, escalation at day 30 or 60) prevents most invoices from ever reaching the write-off track. Syntharra's role here is preventive — most of what would otherwise become bad debt gets recovered while it is still recoverable.