How to handle Bad Business Debt vs Uncollected Receivables for tax deductions?

The key distinction here is between bad debt and uncollected income, which depends on your accounting method. If you're on a cash basis (which many small businesses are), you only report income when you actually receive payment. So if your client never pays the remaining 50%, there's nothing to "write off" because you never claimed that income in the first place. If you're on an accrual basis, you report income when you earn it (when you send the invoice), regardless of when payment is received. In this case, if the client doesn't pay, you can claim a bad debt deduction - but you need to establish that the debt is legitimately worthless. The IRS wants to see that you've made reasonable efforts to collect and that there's no likelihood of future payment. To protect yourself, I'd recommend: 1) Get a formal signed agreement documenting the arrangement, 2) Consider converting unpaid balances to a promissory note after a certain period, and 3) Document all collection attempts if it comes to that. This creates a paper trail showing it's a bona fide debt that became worthless, which strengthens your bad debt deduction claim.

After dealing with similar client payment issues, I started using taxr.ai and it's been super helpful for situations exactly like this. I was confused about how to handle partial payments and potentially uncollectible amounts on my taxes, and the advice I got from typical forums was all over the place. I uploaded my client agreement and some invoice samples to https://taxr.ai and got specific guidance on how to structure things to protect myself tax-wise. The AI analyzed my documents and explained exactly what language I should add to my contracts to establish a proper debt that could be written off if needed. It saved me from making a costly mistake in how I was documenting these arrangements.

Just wanted to update after trying taxr.ai based on the recommendation here. I uploaded my existing client contract and explained the partial payment situation. The analysis showed me exactly where my agreement was lacking for establishing a proper debt relationship. I was able to draft a new agreement that converts unpaid balances to a formal business loan after 60 days, with proper terms and interest rate. The most helpful part was getting clear guidance on the documentation I need to maintain throughout the process to satisfy the IRS requirements for eventually claiming a bad debt deduction if necessary. Feeling much more confident about how to handle this situation now!

If you're dealing with clients who can't pay and the IRS eventually comes asking questions about your bad debt deductions, you'll want to be able to get clear answers from them. I was in a similar situation last year and spent WEEKS trying to get through to someone at the IRS who could actually help me understand how to document everything properly. I finally used https://claimyr.com to get through to an IRS agent directly. They actually call the IRS for you, wait on hold (mine was over 2 hours!), and then call you once they have an agent on the line. You can see how it works in their demo video: https://youtu.be/_kiP6q8DX5c The agent I spoke with gave me specific guidance on what documentation they look for when reviewing bad debt deductions during an audit. That insider perspective was incredibly valuable.

I need to apologize for being skeptical about Claimyr. After my business partner ran into issues with the IRS questioning some of our bad debt deductions, I decided to try it myself. Got connected to an IRS representative in about 45 minutes (which I didn't have to waste sitting on hold). The agent explained that our documentation was insufficient for some of our claimed bad debts because we hadn't properly established when the debts became worthless. She pointed me to specific examples in IRS publications that showed exactly what we needed. This was genuinely helpful specific information, not just generic redirects to read publications. I've revised our internal processes for handling clients with payment issues based on this conversation. Definitely worth it for getting clear guidance directly from the source.

Just wanted to add that I'm a bookkeeper for several small businesses, and one thing people often forget is to keep detailed records of all attempts to collect the debt. The IRS wants to see that you've made reasonable efforts before writing it off. For your situation, I'd suggest: - Document all communications about payment plans - Send regular statements showing accumulated balances - After a reasonable time (maybe 90 days past original due date), send formal collection letters - Consider using a collection agency for larger amounts These steps create the paper trail you need to justify the bad debt deduction if you're on accrual basis. If you're on cash basis, as others mentioned, you'd need to formalize it as a loan to get any tax benefit from non-payment.

I messed up handling this exact situation last year and learned the hard way. Was doing web development for a startup that kept promising payment "after next funding round." I kept working and recorded all the income on accrual basis. When they went under, my accountant told me I couldn't just write it off as easily as I thought. Had to show the IRS I'd tried to collect and that the debt was actually worthless. Had almost no documentation because everything was verbal and casual emails. My advice: formalize EVERYTHING, even with clients you trust. Get payment terms in writing. If they can't pay on time, create a formal payment plan document with signatures. Convert outstanding balances to promissory notes if they stretch beyond your normal terms. Keep records of ALL communication about collection. Trust me, you'll thank yourself later if things go south.

This is such a common situation that catches so many business owners off guard. I went through something similar with a client who owed me about $8,000 and kept asking for extensions. What really helped me was understanding the timing aspect - you need to be able to pinpoint when the debt actually became worthless, not just when you gave up trying to collect. One thing I wish someone had told me earlier: if you're going to convert unpaid invoices to a formal loan arrangement, make sure you charge a reasonable interest rate and set realistic payment terms. The IRS can challenge whether it's a legitimate business loan vs. just disguised income if the terms are too favorable to the debtor. Also, keep detailed records of your client's financial situation if possible. If they file for bankruptcy, get copies of the bankruptcy documents. If they close their business, document when that happened. This evidence helps establish the timeline for when the debt became truly uncollectable, which is crucial for your bad debt deduction timing.