Can I write it off it if my customer does not pay me?

February 2, 2008

Since it is tax time, I will focus on a few common questions that I hear.  I was asked about this one twice this week.  If your customer stiffs you and does not pay their bill, can you deduct it on your taxes?  Well, the answer of course is, “it depends.”

If you are an accrual basis taxpayer, the answer is yes, you can write it off.  Individuals and most small businesses are not accrual basis taxpayers.  When using the accrual basis, when you send out an invoice, it is considered income to you, even though you have not received the money yet.  If this is the case, let’s say you issued an invoice in 2006 and never got paid for it.  That means you had to claim it as income in 2006 if you were on accrual basis.  If this is the case, you can write it off and take a deduction in the year it becomes uncollectible.

The more common case is that you are a cash basis taxpayer.  That means that you don’t claim the invoice as income until you receive the cash.  In this is the scenario with the same conditions, when you issued the invoice in 2006, you did not have to pay tax on it since you did not receive the money yet.  In 2008 when you realize you will never see the money for it, you are not entitled to a deduction since it was never claimed as income in the first place.

Remember that you can only take a deduction if it is something that was claimed as income already.  I hope this tidbit resolves some questions for you.

Donna Bordeaux, CPA with Calculated Moves

Creativity and CPAs don’t generally go together.  Most people think of CPAs as nerdy accountants who can’t talk with people.  Well, it’s time to break that stereotype.  Lively, friendly, and knowledgeable can be a part of your relationship with your CPA as demonstrated by Donna and Chad Bordeaux.  They have over 50 years of combined experience as entrepreneurial CPAs.  They’ve owned businesses and helped business owners exceed their wildest dreams.   They have been able to help businesses earn many times more profit than the average business in the same industry and are passionate about helping industries that help families build great memories.