Bad Debts or another Category?

[TenderToppers]

Hi,

I am a very small S Corporation. My business is selling hats to stores. This year I had several stores that didn't pay the corporation for the hats. Would I list the money that should have been paid to me for the hats under "Bad Debts"? I use the CA method. Or is there another place?

On a different topic, this will be the last year using my DBA with my S Corporation. I am ending this particular business but not the corporation. I want to keep the corporation going, is there anything that I need to do differently this year?

[JeffreyR77]

Under the cash method of accounting, you recognize income when you receive it and you recognize expenses when you pay them. 

As such, you do not recognize money that should have been paid to you. 

The loss is recognized by expensing the costs associated with the hats, the materials, labor, all the costs and expenses that were actually paid to manufacture and/or deliver the hats. 

You are not allowed to write off income you didn't receive.  

Your S-Corporation will remain an active entity as until you terminate it.  You have an annual filing requirement with the IRS to file an 1120-S return whether you have income or not.  

[rogkermi]

Hi Jeffrey,

I have an 1120-S corporation, accrual based, and want to write off a business bad debt.

What account should I use on the P&L?  The billing had never been recorded.

Would the other side of the transaction be in the4 Equity accounts?

Thx,

Roger

[ThomasM125]

You say the billing had never been recorded. I assume you mean that you didn't enter the sales invoice on your books, so the income was never entered on a tax return. If so, you can't deduct the bad debt since that consists of reversing the income from the sale.

The normal entry would be to debit bad debt expense and credit accounts receivable. So, if you don't have it in accounts receivable, there is no entry necessary.

You can't take a deduction for a bad debt per se, you can only reverse the original entry to income. You get a deduction for the cost of the goods or services provided when you purchased the inventory or paid labor for the service provided to the customer, but there is not an additional deduction if the customer doesn't pay for it.