• This field is for validation purposes and should be left unchanged.

The presence of unpaid invoices on your ledger can truly hamper your business; the money owed from customers restricts your cash flow – even as you have to try and continue operations. Now, in addition to continuing to provide services, you have to divert energy and resources to go after those customers, even as you have less capital with which to do so.

Inevitably, once you rack up enough unpaid invoices, you’ll find that you’re paying income tax on money that you don’t even have. Although an optimized payment plan structure can significantly reduce unpaid invoices, it won’t eliminate them. In this blog, we’ll apprise you of the steps to take to rectify the situation.

First and Foremost – Can Your Invoices Be Written Off?

The way to determine this is straightforward: if the system you use for your invoices is an accrual-based accounting system, then yes – you can write off your unpaid invoices since your income is reckoned when you earn it and not necessarily when you receive it. As a result, it is possible to render the unpaid invoice as a bad debt expense so that you needn’t pay income tax on it. 

The Process of Declaring Your Unpaid Invoice As a Bad Debt

Declaring unpaid invoices properly is imperative since it can affect your tax status. As a result, a distinction must be made between a bad business debt and an unpaid invoice/overdue notice. It is incumbent on you to prove several things:

The unpaid invoice must be related to your company’s business
The unpaid invoice no longer has any value at the time of declaration
You have been set back financially because of the unpaid invoice

Gather Your Evidence of the Claims

The IRS is an absolute stickler for bad debt writeoffs; therefore, you must endeavor to provide evidence of your claims. The following are essential:

Get the invoice number
Provide the original due date of said invoice
Calculate the time frame over which the invoice has been delinquent at the time of filing

Once all of this is done, you can write off the bad debt insofar as your income taxes are concerned. In some cases, you may need to file an amended tax return if there are any delays in invoice reporting from the previous year.

At Lode Capital, we specialize in finance and business topics. If you have any questions after checking out our blog posts, please contact us at your earliest convenience.