It depends on whether your business is a CASH or ACCRUAL based one. If someone owes you money that you can't collect, you may have a bad debt. For a discussion of what constitutes a valid debt, refer to Publication 550, Investment Income and Expenses, and Publication 535, Business Expenses. Generally, to deduct a bad debt, you must have previously included the amount in your income or loaned out your cash.
The response depends on your method of accounting for your Sch C activity:
- If you are an accrual basis taxpayer, then you would record this on the "other expense" line with 'bad debt' listed as the description.
- If you are a cash basis taxpayer, then there is no bad debt because you have never claimed the income.