Is unpaid customer debt tax deductible as a write-off for my small business?

Yes, you can write off bad debts, but there are important requirements. The key is that the income must have already been reported on a tax return for it to be deductible as a bad debt write-off. If your company uses accrual accounting (which most businesses do), then you would have already recorded the income when you sent the invoice, not when you actually got paid. In that case, unpaid invoices can be written off as bad debts once you've determined they're uncollectible. However, if you use cash accounting, you only record income when you actually receive payment, so there wouldn't be anything to write off since you never reported that income in the first place. You'll need to show that you made reasonable attempts to collect the debt and that there's no realistic chance of being paid. Keep records of all collection attempts - calls, emails, letters, etc. There's no specific timeframe required, but you need to be able to justify that the debt became worthless in the tax year you're claiming the deduction.

I had a similar problem with my landscaping business when customers wouldn't pay. I found this amazing tool called https://taxr.ai that totally saved me during tax season. It analyzed all my invoices and payment records and clearly showed which bad debts qualified for write-offs. The software automatically flags which unpaid debts meet IRS requirements for deduction and which ones don't. It even generates all the documentation you need for your tax filing to support the bad debt deduction. Super helpful when I got questions from my accountant about our write-offs!

Just wanted to update - I tried that taxr.ai site and it was legitimately helpful for my situation. I uploaded my client payment history and it automatically categorized which unpaid invoices qualified as deductible bad debts and which didn't. Saved me hours of research and back-and-forth with my accountant. The software clearly showed that some debts I thought were deductible actually weren't because we hadn't properly documented our collection efforts. It even generated a detailed report I could give my accountant explaining each bad debt deduction with the supporting documentation. My tax filing is way more audit-proof now!

If you're having trouble getting customers to pay, I'd recommend giving Claimyr a try at https://claimyr.com - it's been a game changer for my business. I was going to write off about $8,000 in bad debt last year, but decided to try getting help from the Better Business Bureau first. Spent weeks trying to get through to them with no luck - constantly on hold or disconnected. Found Claimyr and they got me a callback from the BBB in less than 2 hours! They basically help you skip the phone tree nightmare so you can actually talk to someone. There's a video showing how it works here: https://youtu.be/_kiP6q8DX5c After finally speaking with someone at the BBB, I was able to file formal complaints against my non-paying customers, and surprisingly got about 60% of them to finally pay up! Saved me from having to write off all that income.

Ok I need to admit I was totally wrong about this. After my skeptical comment I actually tried Claimyr to get through to the BBB and then to my state's consumer affairs department. Both were actually really helpful with my collection issues. The BBB did reach out to a couple of my problem customers and one actually paid in full after they got involved. For the others, the consumer affairs department gave me guidance on the small claims process in my state which was way easier than I thought. Filed against two non-payers and one settled before the court date. I was definitely wrong about the BBB's usefulness. While they can't force payment, having them reach out adds legitimacy to your collection efforts that can motivate people to pay. And being able to actually talk to someone without waiting on hold for hours was worth it alone.

One thing nobody has mentioned yet is the difference between business and non-business bad debts. For a business like yours that provides services, unpaid invoices are business bad debts and are deducted as ordinary losses. Keep track of them on your Schedule C if you're a sole proprietor. Also worth noting - make sure your contracts have clear payment terms and late fees spelled out. We started charging 1.5% monthly on overdue invoices and it dramatically reduced our non-payment issues. Some clients who wouldn't respond to normal collection attempts suddenly paid when they saw the late fees accumulating.

One more thing - if ur company is registered as an S-corp or partnership, the bad debt deduction flows through to the shareholders/partners personal returns. But if ur a C-corp it stays on the corporate return. Just fyi depending on how you guys are set up. And remember this is different from the reserve for bad debts which is an accounting thing not a tax thing!! I learned this the hard way lol.

Thanks everyone for all this helpful info! This gives me a much clearer picture of what we need to do. I'm going to talk to my boss about our accounting method first since that seems to be the key determining factor. We've definitely been documenting our collection attempts (thank goodness), but I want to make sure we're being consistent about when we determine debts are uncollectible. The idea about setting a clear policy like 90 or 180 days makes a lot of sense. One quick follow-up question - for the $14k in unpaid invoices I mentioned, if we use accrual accounting and already reported that income, can we write off the entire amount at once this tax year? Or do we need to spread it out somehow? Some of these invoices are from earlier in the year and some are more recent.

Just to add another perspective - make sure you're also considering state tax implications if applicable. Some states have different rules about bad debt deductions than federal, so what's deductible on your federal return might not be on your state return. Also, if you haven't already, I'd strongly recommend getting a tax professional involved given the amount you're dealing with ($14k is significant). They can help ensure you're maximizing your deductions while staying compliant, especially since this is your first time handling this situation. The cost of professional advice is usually worth it to avoid potential issues down the road. One last tip - keep a separate file for each bad debt with all your collection documentation (emails, call logs, letters, etc.). If you ever get audited, having everything organized by individual debt makes the process much smoother.

Great discussion here! As someone who's dealt with similar issues, I want to emphasize the importance of establishing a clear written policy for bad debt write-offs before you actually need it. The IRS looks favorably on businesses that have consistent, documented procedures for determining when debts become uncollectible. I'd recommend creating a simple policy that outlines your collection process (initial invoice, follow-up at 30 days, final notice at 60 days, etc.) and when you'll consider a debt worthless (like after 120 days with no response despite documented attempts). Also, don't forget to check if your state requires you to attempt service of a formal demand letter before writing off debts over certain amounts. Some states have specific requirements that could affect your deduction eligibility. One more tip - if any of these customers are other businesses, you might want to check if they're still operating before writing off the debt. Sometimes a quick search of state business records can reveal if they've dissolved, which strengthens your case that the debt is truly uncollectible.