Bad Debt Write-Offs for Small Businesses

Bad debt write-offs are common for small businesses. It is important however that you write them off correctly and that everything is properly documented. Below are a few guidelines on what qualifies as a bad debt as well as a few things to consider when writing them off.


A bad debt is basically a business account that you were unable to collect on. Bad debts occur when a service is provided and the customer does not pay for it, leaving the business without that compensation. This unfortunately is just a part of many small business expenses. Thankfully these bad debts are tax deductible as long as you have the proper proof. In order to claim these bad debts on your taxes, you must follow the 3 requirements below.

Proving Debt Relationship

You must be able to prove that you had a business relationship with the customer or business in which the bad debt exists. This is typically the easiest of the 3 requirements for small businesses to prove. In order to back up the relationship for your bad debt with a customer, provide receipts, invoices and written contracts. These documents should be able to back up the fact that transactions have occurred with this particular customer or business.

Proving Uncollectable Status

Proving that the debt is uncollectable is a little bit more difficult to prove. Basically you will need documentation backing up that there is slim to no chance of this debt being paid in the near future or ever. This typically means documentation of attempts to collect on the debt including phone records, copies of letters or notices and any legal action that you may have taken to pursue the customer or business.

Proving Loss to Business

This final requirement of the IRS is the most difficult for a small business to prove in regards to bad debts. You must show in some way that the business has experienced a loss due to the debt. The best and most efficient way of proving this is to provide proof of accrual accounting done. Accrual accounting basically means that at the time of the actual sale or service, the income is recorded. So when you later look at the records and the sale went without compensation to the business, it appears as a debt. Unfortunately this proof has to come from proper documentation from the beginning. It is important for small businesses to keep accurate records daily in order to back them up later on.

Once you have ensured that each of these requirements has been met, you will need to write-off the bad debt in the same year that it become uncollectable. This is one detail that many small owners overlook, causing them to miss the deduction. If you fail to do this or to keep proper documentation to meet these IS requirements, you will be able to just deduct the cost it took to make or provide the good or service.