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Unpaid invoices are deductible

Unpaid invoices are deductible

If you have unpaid invoices, you can deduct that bad debt on your applicable business income tax return, according to the IRS.

The uncollectable money owed to you can be a benefit come tax time by being claimed in two ways, specific charge-off method or nonaccrual-experience method.

If you use the specific charge-off method, you can deduct specific unpaid invoices that become either partly or totally worthless during the tax year.

If a debt becomes totally worthless in the current tax year, you can deduct the entire amount, less any amount deducted in an earlier tax year when the debt was only partly worthless.
For partly worthless bad debts, deductions are limited to the amount you charged off on your books during the year.

If you did not deduct a bad debt on your original return for the year it became worthless, you can file a claim for a credit or refund.

If you use an accrual method of accounting, you can use the nonaccrual-experience method for bad debts. Under this method, you do not accrue service related income you expect to be uncollectible. Because the expected uncollectible amounts are not included in income, these amounts are not later deducted from income.
Generally, you can use the nonaccrual-experience method for accounts receivable for services you performed only if the services are provided in the fields of accounting, actuarial science, architecture, consulting, engineering, health, law, or the performing arts; or you meet the $5 million gross receipts test for all prior years.
All other bad debts are nonbusiness bad debts and are deductible only as short-term capital losses.

You may have to claim it if you collect it later.

If you claim a deduction for a bad debt on your income tax return and later recover (collect) all or part of it, you may have to include all or part of the recovery in gross income. The amount you include is limited to the amount you actually deducted. However, you can exclude the amount deducted that did not reduce your tax. Report the recovery as “Other income” on the appropriate business form or schedule.

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