How do I write off a bad debt from an unpaid invoice on my business taxes?
How do I write off a bad debt from an unpaid invoice on my business taxes?
Short answer
Accrual-basis businesses can deduct bad debts when they are deemed uncollectible. Cash-basis businesses (most freelancers and small businesses) cannot deduct bad debt because they never recognized the income. Consult your accountant for the specific write-off process.
Whether you can write off a bad debt depends entirely on your accounting method. Under accrual accounting (you record revenue when the invoice is issued, not when it's paid), you already reported that income on a prior tax return. When the invoice becomes uncollectible, you deduct it as a bad debt expense, effectively canceling the income you already declared. You need to be able to show that you made reasonable efforts to collect before writing it off.
Cash-basis accounting is common for sole proprietors, freelancers, and many small LLCs. You only record income when payment is received. An invoice you never got paid for was never recorded as income. No income to reverse, no bad debt deduction. The loss just doesn't appear in your books. That isn't necessarily a disadvantage; it's how cash-basis accounting works. You pay tax on what you actually received.
Documentation for a bad debt deduction: the original invoice, evidence of delivery, your collection efforts (demand letters, call logs, collection agency engagement), and a note in your records stating the debt was deemed uncollectible and the date of that determination. The IRS may ask for this if the deduction is questioned. Writing off an invoice doesn't stop you from continuing to collect. If the customer later pays, report that payment as income in the year received.