Can I deduct cost of services that are not paid on a project over budget?

[kaplan]

I'm working on a project and tracking my time which then bill against. I found out there are no more hours to bill for the remaining quarter. I'm a freelancer often working with a budget or flat bid that almost always goes over budget. Most or all the time I keep working and 'eat' those hours as the cost of doing business, it lowers my overall average rate, but I prefer a happy client. I want to know if there are any ways to deduct the loss I'm taking on a project for hours that go unpaid.

If I keep working on the project and tracking hours that I can't be paid for by the client, can I deduct those losses on my taxes against my reported income?

[Critter-3]

I want to know if there are any ways to deduct the loss I'm taking on a project for hours that go unpaid.

No ... when you are a cash based taxpayer you will report the income when received and the expenses when paid.  You cannot deduct anything for your unpaid labor. 

[Opus 17]

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@kaplan wrote:

If I keep working on the project and tracking hours that I can't be paid for by the client, can I deduct those losses on my taxes against my reported income?

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You don't have a "loss" to deduct, you just have less income to report.

You can't deduct an item from your income that was never part of your income to begin with.  

[kaplan]

Thanks for confirming, that's the feeling I got as I wrote my question. 

[Opus 17]

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@kaplan wrote:

Thanks for confirming, that's the feeling I got as I wrote my question. 

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It's similar to giving away free samples of your inventory or selling items "on sale."  You deduct the cost of goods when you acquire your inventory and you report the selling price when you sell.  If you sell for less, or give the product away, you don't have a "loss", you just have less income to be taxed.  

(If you were an accrual based taxpayer, I believe you would book the entire revenue for all your hours then take the unpaid hours as a loss, but the net income is still the same in the end.)