The answer to this question is determined by how the business files its return - Cash Basis or Accrual Basis.
With Cash Basis, a company reports income as it is actually received and expenses as they are actually paid. With Accrual Basis, however, income is reported as it is earned and expenses as to when they become payable.
If the company uses Cash Basis reporting then there is nothing to deduct. If you invoiced a client for services rendered and that client does not pay the invoice, no income was received; therefore, no income was ever reported. Since no income was not reported, you were not taxed. Once the invoice is determined as uncollectible, you can just void the invoice.
If, however, you had reported income on an accrual basis and paid tax on the income in a prior year, then the company can deduct that portion of the invoice which was not paid on the following year return as Bad Debt Expense. When it is determined that an invoice is uncollectible, you would debit Bad Debt Expense and credit Accounts Receivable for that client.
The IRS does not allow for the deduction of time expended which was not paid for or previously reported as taxable income. In addition, you cannot take a charitable deduction for services rendered.
If you were to contribute a product, you can deduct as charitable contribution the cost of the product only. You cannot deduct any profit which you may have received on the product if you had sold it instead of contributing it.
