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Debt Management Tips: How to Write Off Unpaid Invoices as a Tax Return

"TAXES" sign next to dollar bills of 50$ representing the importance of paying taxes in debt management
  • Blog
  • Jill
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  • February 9, 2021

Debt Management Tips: How to Write Off Unpaid Invoices as a Tax Return

Having an unpaid invoice means that you’re not getting paid for the products or the services that you’ve provided. Likewise, unpaid invoices can wreak havoc on small businesses. When this happens, you may experience debt management problems that could prevent you from paying your bills. It also means that you’re paying taxes on income that you haven’t received.

You should have a financial management plan that minimizes unpaid customer invoices. However, even with a plan, there may be times when unpaid invoices are simply unavoidable. When this happens, you should know how to write them off.

Determining if You’re Eligible to Write Off Unpaid Invoices

As you look at your unpaid invoices, you can take certain steps to determine if you can write them off as a means of debt management. To do this, here are the four steps you must take:

  • If you’re using a cash-based accounting system, you won’t be able to write off these invoices. This is because you’re only counting received revenue. Since you haven’t received any income, you’re debt-free and have nothing to write off. However, with an accrual-based accounting system, you’re counting any income you receive so you should write off any unpaid invoices as a bad debt so that you don’t pay for it.
  • The way you write off unpaid invoices varies depending upon your tax status. In either case, you’ll want to make sure that your unpaid invoices are considered a “bad business debt” by the IRS. Just because an invoice is late doesn’t automatically qualify it. You must also be able to prove that the invoice is related to your small business and has kept you from being debt-free.
  • The IRS is strict about debt management. Therefore, you must make sure that you have a strong basis for your claim. You’ll need documentation that the customer didn’t pay you because they either went bankrupt or died. Additionally, you must keep track of your efforts (e.g. emails, letters) to collect your outstanding invoice. Record the invoice number, due date, and how overdue it is in case you decide to hire a collection agency. While this whole financial management process is pretty straightforward, you’ll still need to document the bad debt that you’re claiming. You must demonstrate that the client was legally obligated to pay you. For this, the only thing that you should need is your contract documents.
  • Once you determine that the bad debt is indeed worthless, you should be able to write it off when it’s time to file your taxes. Unfortunately, you can only write off unpaid invoices for the year for which you’re filing taxes. If an unpaid invoice from another year becomes worthless, then you must file an amended return for that year. In this case, you’ll be given a refund of the taxes that you’ve already paid for that year.


Many people who use cash-based accounting will feel like they’re getting the raw end of the deal here. However, the sad truth is that nobody comes out as a winner if they have unpaid invoices because these simply become worthless. The only reason you may be able to write off an unpaid invoice is that you’ve paid taxes on some income that doesn’t exist. 

Now that you have a better understanding of when it’s possible to write off unpaid invoices as a tax return, you may need some legal help doing so. Contact Bartifay Law today for trusted, reliable advice.

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