How to write off a bad debt


How To Write Off Bad Debt

For more information on business bad debts, refer to Publication 535, Business Expenses. The accounts receivable and the allowance for doubtful accounts are listed on the balance sheet as current assets. When you subtract the allowance for doubtful accounts from the accounts receivable, what remains is your net accounts receivable balance. This net balance is the total dollar amount of the individual customer accounts that you expect to pay their bills. The allowance for doubtful accounts balance only changes when you write off a customer’s unpaid account. Bad debt refers to any amount owed to you that you will never be able to collect.

When should receivables be written off?

A write-off is an elimination of an uncollectible accounts receivable recorded on the general ledger. An accounts receivable balance represents an amount due to Cornell University. If the individual is unable to fulfill the obligation, the outstanding balance must be written off after collection attempts have occurred.

It may also be necessary to reverse any related sales tax that was charged on the original invoice, which requires a debit to the sales taxes payable account. Nonbusiness bad debts only qualify for capital How To Write Off Bad Debt loss treatment—meaning they can only offset capital gains and up to $3,000 of ordinary income per year. You can carry forward nonbusiness bad debts if you can’t use them in the current year.

Topic No. 453 Bad Debt Deduction

An allowance for doubtful accounts is considered a “contra asset,” because it reduces the amount of an asset, in this case the accounts receivable. The allowance, sometimes called a bad debt reserve, represents management’s estimate of the amount of accounts receivable that will not be paid by customers. If actual experience differs, then management adjusts its estimation methodology to bring the reserve more into alignment with actual results.

You should always be able to see your bad debts on your general ledger. They get listed on your income statement under ‘selling, general, and administrative costs’ (SG&A). Remember that your bad debts will influence your net income and you may need to look at how you handle your financial obligations if you have too many outstanding accounts in your books. No matter how bad debt is tracked, there must come a point when it is decided the debt is uncollectible and must be written off—no matter the amount of bad debt. We’ll look at a specific solution to avoid this problem further down. Before you write off the debt, you’ll need to be able to prove to the IRS that you’ve taken sufficient steps to collect the debt, because bad debts lower your business’ taxable income. The allowance method estimates bad debt expense at the end of the fiscal year, setting up a reserve account called allowance for doubtful accounts.


Under the accrual accounting method, you record the $1,000 sale at the time you bill the customer. In most cases, you can reclaim tax paid on bad debts; and it’s a form of bad debt relief applied to both accounts receivable and accounts payable. The IRS also requires that you attach a bad-debt statement to your tax return, explaining the details of the loan you made. The direct write-off method takes place after the account receivable was recorded. You must credit the accounts receivable and debit the bad debts expense to write it off. The aggregate balance in the allowance for doubtful accounts after these two periods is $5,400. Once a particular debt has been identified as uncollectible, it’s possible to write off the debt by charging it as an expense.

In other words, the debtor must have completely stopped making payments, and you must have strong reason to believe that they’ll never pay you back. For example, say the borrower fails to pay any part of a loan due June 2022 and doesn’t have the means to pay it back. However, a borrower may file for bankruptcy in November 2021 without having paid anything on the loan, making that debt a worthless bad debt before the loan’s deadline. Scroll down the chart until you find the Account for which you would like to view the Bad Debts Report. In the Action column of the bad debts account, select Run report. When a customer is late in paying, however, most companies continue to carry the obligation under “Accounts receivable” for some time. During this time, they use various means to encourage the customer to pay .

How to Report Non-Business Bad Debt on a Tax Return

Debt collection requires a great deal of expertise that some companies do not have. Commercial law, for example, is often complex and varies greatly from one country to another. To help you, do not hesitate to check our country risk reportsthat give you information on how to manage these local risks and practices effectively.

Remember, with TurboTax, we’ll ask you simple questions about your life and help you fill out all the right tax forms. With TurboTax you can be confident your taxes are done right, from simple to complex tax returns, no matter what your situation. It may take a few years, but eventually you’ll be able to claim the entire loss incurred on your tax returns. In the Reverse G/L box, enter the appropriate reverse general ledger number for your adjustment. If you’re not using general ledger, you can just accept the default reverse account.