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Can you write off business bad debts? The answer depends on a couple of points.
Only businesses that record income on an accrual basis can write off uncollectible accounts. Cash-basis businesses don't recognize revenue until it's received, so there should be nothing on the books
to deduct. Accrual-based businesses recognize revenue when it's earned so when they have delinquent accounts, they may have to pay taxes on money they're owed but may never collect.
However, if you determine a debt is worthless, you can write it off in that same year, eliminating it from your taxable income. The catch: You must make reasonable efforts to collect the amount due. Keep a record of calls, letters, and other contacts with the debtor for the purpose of collecting. According to the IRS, you don't have to wait until the bill is actually due to deem it worthless if you can show that there is no hope of collecting on the account. For example, a debtor filing bankruptcy is pretty good evidence that an unsecured debt is at least partially uncollectible.
With the end of the year right around the corner, increase your efforts to clear up bad debts. Regardless of the outcome, you stand to gain. Your business will either collect some of the money owed, or be able to deduct uncollectible amounts as bad debts.
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Contact us for more information about bad debts and other tax planning strategies you can implement before December 31st. |
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