What Is Bad Debt?

Bad debt is money a customer owes you that you no longer expect to collect. It usually starts as an overdue invoice that stays unpaid after reminders, calls and a final notice, or after the client closes down. When you accept the money is gone, you write it off: you remove it from accounts receivable and record it as a loss.

Write-offs matter for tax, but the US rules depend on your accounting method. According to the IRS, most cash-method taxpayers can't deduct unpaid fees, because that income was never counted. A business on the accrual method has already reported the invoice as income. It can generally deduct the bad debt in the year the debt becomes worthless, if it can show reasonable efforts to collect. Ask your accountant how this applies to you. This page is general information, not tax advice.

Writing off a debt in your books doesn't cancel it. You can still accept payment if the client pays later, and you record that as income when it arrives.

Preventing bad debt costs less than chasing it. Take deposits on large jobs, set clear payment terms, send reminders promptly and check your aging report every month.