When Can You Deduct Bad Debts?

 

    Sometimes in business, customers don’t pay what they owe. While this is frustrating, you might be able to reduce your taxes by deducting these bad debts. But when can you do that?

 

• Business Debts Only: If you sold a product or service and didn’t get paid, you might be able to deduct that loss. However, if you lent money to someone personally, you can’t deduct that if they don’t pay you back.
• Counting Income When Earned: If your business counts income when you earn it—meaning you record sales when they happen, not just when you get paid—then you can deduct unpaid debts. If your business only records income when money actually comes in, you can’t deduct a bad debt because you never counted that unpaid amount as income in the first place.
• Uncollectible Debt: Before you can deduct a debt, you have to be sure it’s truly uncollectible. This means you’ve tried everything you can to get paid—like sending reminders and making phone calls—but still didn’t get the money.
• Partial Deductions: If you manage to get some of the money back, you can still deduct the part you didn’t recover.

 

In short, if you sold something, didn’t get paid, and you keep track of your sales when they happen (not just when you get the money), you might be able to reduce your taxes with a bad debt deduction. Be sure to keep good records and check with a tax professional to make sure you’re doing it right!