Writing Off DebtIf your business utilizes a cash basis accounting method, you don’t need to worry about writing off uncollectible debt, since you do not count the money until an invoice has been paid. You can claim expenses related to unpaid invoices, but you do not owe any taxes on that unpaid income. If you’re an average-sized company, you file your taxes on an accrual basis, where unpaid invoices are counted as income on which your business owes taxes. If those unpaid funds are counted as uncollectible debt, you can write off that amount as a “bad debt expense.” It’s important to know that there are no universal rules to tell you whether or not a debt is uncollectible, but there are many warning signs.
Signs a Debt May Be Uncollectible
- A company has declared bankruptcy
- A company or person states that they will not pay the debt
- A company or individual refuses to answer any communication
- A company that seems to always be in crisis, with new employees coming on board and older ones gone every time you call
- A company with layoffs
- A company with many excuses (never received/can’t find the invoice, check signer out of the office, strange disputes, etc.)