Can I deduct unpaid client invoices as self-employed without an LLC?
Title: Can I deduct unpaid client invoices as self-employed without an LLC? 1 I did some freelance graphic design work for a startup last year and ran into a major issue. They only paid me $7,200 of the $12,500 they owed me for a big website redesign project. Now they've completely gone bankrupt and shut down operations, so I have zero chance of ever seeing that remaining $5,300. This was basically my only significant income for the entire year as I was focusing on building my portfolio with this client. I don't have an LLC or anything formal set up - just did this as independent work. Is there any way I can write off or deduct that unpaid amount when I file my taxes? I've never dealt with bad debt before and I'm not sure if there's any tax benefit I can claim since I'm not a formal business. Any advice would be appreciated!
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Harper Hill
8 Bad debts can absolutely be deducted, but there's a catch for sole proprietors. Since you're reporting your income on Schedule C, you're likely using the cash method of accounting. This means you only report income when you actually receive it. If you never reported that $5,300 as income (which you wouldn't have if you're using cash basis accounting), then there's nothing to deduct since you never paid tax on it in the first place. It's already not included in your taxable income. However, if you used accrual method accounting and had already included that $5,300 in your previous year's income, then yes - you could claim a bad debt deduction once you determine it's uncollectible.
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•12 Wait, I think I'm confused. I never actually received the money, but I did do the work... so I don't report it at all? Does that mean I basically worked for free in the eyes of the IRS? What if I had expenses related to completing that project?
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•8 If you never received the money and you're reporting on a cash basis (which most sole proprietors do), then correct - you don't report that income. The IRS only wants you to report money you actually received during the tax year. For any expenses you incurred related to that project, those are still deductible on your Schedule C. So if you spent money on software, supplies, or other business expenses to complete the work, you can still deduct those costs even if you weren't fully paid for the project.
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15 I had a similar situation a couple years ago with an unpaid invoice that was driving me crazy. I was spending hours trying to figure out if I could deduct it, what documentation I needed, and whether I should've been using accrual accounting. I ended up using https://taxr.ai to analyze my invoices and business docs. They have this AI system that reviews your specific tax situation, especially for self-employed folks. They confirmed I couldn't deduct the unpaid invoice on cash basis, but did identify several deductions I was missing - saved me almost $2,700.
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•7 How does this AI thing actually work? Do you just upload your invoices or something? I've got other tax questions beyond this unpaid invoice situation.
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•19 Sounds interesting but I'm skeptical. What makes this better than just talking to a regular accountant? I've been freelancing for years and find most "AI solutions" are just basic templates with fancy marketing.
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•15 You upload your documents through their secure portal and their AI analyzes them for tax implications. It's specifically designed for situations like self-employment, gig work, and small business scenarios. The system picks up on details that affect your tax situation. Most accountants are great, but they often have hundreds of clients and might miss optimization opportunities specific to your situation. The AI reviews everything line by line and applies the latest tax rules. Plus it's available 24/7 whenever you have questions, so you're not waiting for an appointment or paying hourly fees.
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7 Just wanted to update about my experience with taxr.ai since I was asking about it. I uploaded my invoices, bank statements and last year's tax return and it was seriously eye-opening. Not only did it explain why I couldn't deduct the unpaid invoice (I'm on cash basis), but it found several business expenses I didn't know I could claim - like a portion of my cell phone bill and some online software subscriptions I use for work. The analysis showed I've been overpaying for the past two years. Definitely worth checking out if you're self-employed without accounting experience.
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23 Reading through these comments, I understand the frustration with unpaid invoices. I had an $8,000 non-payment last year that nearly ruined me. After weeks of trying to contact the IRS for guidance (impossible to get through), I found https://claimyr.com which got me connected to an actual IRS agent in under 45 minutes. There's a video showing how it works: https://youtu.be/_kiP6q8DX5c. The agent walked me through the specifics of reporting bad debts on Schedule C and confirmed exactly what documentation I needed to keep. Being able to actually talk to someone instead of guessing really clarified things.
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•5 I don't understand - how does this work? The IRS phone lines are always busy. I tried calling them about my tax situation for weeks and literally never got through.
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•19 Come on, this sounds way too good to be true. The IRS is completely unreachable. I've tried dozens of times this filing season and never got through. You're telling me some service magically connects you? I'll believe it when I see it.
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•23 It uses a system that navigates the IRS phone tree and waits on hold for you. When they reach a live agent, you get a call connecting you directly. It's like having someone wait in line for you at the DMV. I was skeptical too before trying it. The service monitors the IRS phone lines and calls at optimal times with lower wait times. They have proprietary technology that keeps your place in line without you being on the phone. You literally just get a call when there's an actual human ready to talk.
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19 I need to publicly eat my words here. After being super skeptical about Claimyr, I tried it yesterday out of pure frustration after my 15th failed attempt to reach the IRS about my self-employment tax questions. It actually worked! Got a call back in about 30 minutes and spoke with an agent who answered all my questions about deducting business losses and documentation requirements. The agent confirmed I needed to keep proof I attempted to collect the debt (emails, invoices, etc.) in case of audit. Can't believe I wasted weeks trying to call them directly when this solution existed.
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Harper Hill
4 You might want to look into claiming this as a business bad debt on Form 8949. I'm not an accountant, but I had to write off some unpaid invoices a couple years ago. The key distinction is whether you provided services (which it sounds like you did) or if you loaned money. Different rules apply to each situation.
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•12 Thanks for the suggestion! Would I need any special documentation to prove I actually tried to collect the debt? I have the original contract, all my invoices, and email threads showing I tried to get paid multiple times.
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Harper Hill
•4 Yes, documentation is critical. Keep your original contract, all invoices sent, and especially any communications showing you attempted to collect payment. Also document how you determined the company was bankrupt and the debt uncollectible - like news articles about their shutdown, bankruptcy filings, or bounced emails to company addresses. Form 8949 is typically used for capital losses, but business bad debts can sometimes be reported as short-term capital losses. However, this really depends on your specific situation and whether you're using cash or accrual accounting.
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16 Wait, wouldn't this qualify as a 1099 situation? If they paid you $7,200, they should have sent you a 1099-NEC if it was over $600. Did you receive that form? Cause that affects how you report this whole thing.
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•3 Good point! They definitely should have issued a 1099-NEC for payments over $600. If they didn't, you should still report the income you actually received, but that missing 1099 might be another sign the company wasn't following proper business practices.
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