Can I get a write off for an old invoice that was never paid by a client?
Q: Dear Ruchi, I have an old client invoice that I am just realizing was never paid. Is there a way to get a tax deduction on this? What should I do?
A: Keeping track of invoices and due dates are an important part of running your own business. It can be tricky but as I always say, staying organized is the best way to thrive. For this question, we go back to an important factor that we covered in a previous Ask Ruchi column! The accounting method you use for your business will determine if you will be able to take a tax deduction for an unpaid invoice.
Before you keep reading, be sure to double-check which accounting method you use for your business. You can click here for guidance. Are you using the cash basis or accrual basis accounting method?
If you use the accrual basis accounting method, you’re in luck! With this method, your income is recorded when it is earned rather than when the cash is received. In this case, if the services were performed in 2021 and your invoice was sent then, this unpaid income would have been reflected in your 2021 taxes. If the client still has not paid you by the end of the following year (2022), then you are eligible to take a deduction for the amount you have already claimed as income.
If you are using the cash basis accounting method, you won’t be eligible to take a tax deduction in this circumstance. When you use this method, you recognize income when it is received, rather than when it was earned/invoiced. In this case you haven’t recognized the income on your books or taxes yet since you only record income when you are paid, therefore there is no deduction available.
Regardless of which method you use, I advise you to follow up with your client first. If that doesn’t get you results, you can always get a third party involved, like an advisor who can help you work out a payment plan. You can also talk to an attorney to see if there is any legal action you can take.
Here’s to your prosperity!
Ruchi