Writing Off Business Bad Debt

Posted on August 14, 2018 in Money & Finance

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It’s been said that “every silver lining has a cloud,” and that certainly applies to having business bad debt. In a number of cases, you can get a tax deduction and write off the bad debt against income. But the fact remains that, to get the write-off, the debt has to be uncollectible. Which means that you’ve lost a paying customer.

In addition, there are several things you have to establish before you can legitimately write off the debt:

  • You’ve already declared the income. As noted on BrightHub.com, unless you have already reported or booked the income from the sale (such as if you run your business on an accrual tax-paying basis), you cannot write off the debt. This can be a source of huge frustration for service-based businesses, so speak to your tax advisor about ways to minimize the damage.
  • Your company had a legal relationship with the debtor. How can you show that? According to BadCrediting.com, either by having a written agreement or invoices showing what was provided/owed.   You can’t write off a handshake.
  • The receivable is worthless. Have you taken any steps to try to collect what you’re owed? (If not, sign up for a free copy of my Contracts & Collections Info Kit, which will help you develop a collections policy and procedure.)  Has the debtor filed for bankruptcy? A little legwork is necessary–you can’t just sit back, take no steps, and then throw up your hands and say “write it off.”

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