Resources
How to write off bad debt: evidence, books and tax treatment
An overdue invoice is a starting point for investigation, not proof that a debt is worthless. Assemble the collection history and accounting records before asking your CPA to determine a deduction.
Last reviewed:
General information, not legal or tax advice.
Check whether the amount ever entered taxable income
The IRS generally requires that an amount have been included in income or represent cash actually loaned before it can support a bad-debt deduction. Cash-method taxpayers generally cannot deduct unpaid fees, rents or similar amounts that were never included in income. Clearing an invoice from a receivables report and claiming a tax deduction are separate decisions.
Sources: IRS Topic no. 453, Bad debt deduction; IRS Publication 334 (2025), Tax Guide for Small Business, Bad Debts
Document why repayment is no longer reasonably expected
Worthlessness depends on the surrounding facts and circumstances. The IRS requires reasonable collection efforts but does not require a court case when a judgment would be uncollectible. Preserve correspondence, disputed-invoice details, payment attempts and any evidence about the debtor’s ability to pay. A long aging period alone is not the whole file.
Match the write-off to the appropriate year
The deduction belongs in the year the debt becomes worthless, and it may become worthless before its stated due date. Publication 334 generally requires the specific charge-off method for business bad debts. For a partly worthless debt, the deduction is limited to the amount charged off on the books during that year. Have the CPA review the evidence and proposed entry together.
Sources: IRS Topic no. 453, Bad debt deduction; IRS Publication 334 (2025), Tax Guide for Small Business, Bad Debts
Separate business receivables from personal lending
The IRS treats business and nonbusiness bad debts differently. Nonbusiness debts must be totally worthless and are reported as short-term capital losses on Form 8949 with a detailed statement. Do not put an owner’s personal loan into customer write-offs merely because the business maintains the records.
Retain the file after the balance is removed
If a previously deducted debt is recovered, Publication 334 calls for income reporting except to the extent the earlier deduction did not reduce tax. Keep the original invoice and write-off decision searchable after closing the account. A later receipt should be identified as a recovery for CPA review rather than silently reopening or duplicating the original sale.
Sources: IRS Publication 334 (2025), Tax Guide for Small Business, Bad Debts
Sources: check whether the amount ever entered taxable income
Before removing an unpaid balance
Clean up receivables with an evidence trail
Tidwell helps reconcile customer balances and document approved adjustments, while your CPA decides whether and when a bad-debt deduction applies.