What You Should Know About Collecting Uncollectible Debt and Tax Write-Offs

August 1, 2018
One of the most common questions that business owners have to wrestle with throughout the year, but especially at tax time, is whether or not a debt should be classified as uncollectible and written off. You’ve tried calling, sending letters and following up until your fingers have callouses from dialing the phone so many times. Now it’s time to decide—have you done all that you can to collect?

Writing Off Debt

If 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.)
When you’re dealing with uncollectible debt, it’s tempting to write it off and move forward. However, if you haven’t partnered with a skilled collection agency yet, there’s a chance that a significant portion of your “uncollectible debt” is actually collectible. It may just take an expert.

Why Should You Try to Collect Before You Write Off?

A collection agency collecting “uncollectible debt” is always better for your bottom line than writing off the debt. For example, consider a company in the 33% tax bracket. This company has a $10,000 unpaid invoice they had sent to a client company. Writing off that debt saves the company $3,300 on their taxes. However, if a collection agency collects that $10,000 and takes a 35 % contingency fee, you would have $6,500 to add to your bottom cash flow. Recovering $6,500 is a lot better than a $3,300 tax deduction.

Alacrity Collections Can Collect Your Uncollectible Debts 

Alacrity Collections is proud to be a leader in collecting overdue receivables. We achieve results that are over twice the national average and treat every customer with dignity and respect. We work tirelessly to protect your brand and improve your net returns. To learn more about our offerings and get in touch, please call us at 1-800-752-9663 and ask for Heike Heemann. You can also set a phone appointment with her – a great way to get your questions answered – by booking your preferred time slot in her calendar via www.calendly.com/hheemann.