You can write-off unpaid invoices if you meet the following tests:
- The unpaid invoices were recorded in your computerized accounting system (e.g., QuickBooks). This will allow the invoices to remain on your books and be included in the applicable reports until they are either written off or paid. If you use a non-computerized system such as Word, then you are not able to write off the invoices unless the invoice income appears in the applicable reports. If they do not, then the assumption is there is nothing to report.
- If you are an accrual-basis taxpayer and included the amount as income on your tax return, then you are able to deduct the amount as a bad debt in the year that it was written off. The reason being is an accrual-basis taxpayer has already paid the tax on the invoice, while a cash basis taxpayer doesn't report the income until payment is received.
- You must have the substantiation to prove to the Internal Revenue Service (IRS) that you have taken the necessary steps to collect the invoice amounts. The IRS will allow the write-off if the amounts were included on your prior year tax return, and you have taken steps to collect the invoices. Records of the Bankruptcy filing and Gone out of Business should suffice in your situation.
If you have met the above criteria, then do this will in your return:
- Type Schedule C in Search
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Click the Jump to Schedule C link, or the Go to Schedule C button
- Navigate through the program and enter your Schedule C information
- When prompted to enter your expenses, scroll and check Other Miscellaneous Expenses, click Continue
- Click Start next to Other Miscellaneous Expenses
- Enter "Bad Debt" as the description and the amount of the two invoices
- Click Continue
The amount will appear in Part V, "Other Expenses" of the Schedule C and transferred to line 27a in Part II of the Schedule C.
