Home Business Taxes: Deducting Business Bad Debts

Charge off on the books? You might be able to deduct it from your home business taxes.

One of the most frustrating issues you face in your home business is someone who doesn't pay you as agreed. You can send the account to collections, take the other business owner to small claims court, or try other methods to collect. And what if the client STILL doesn't pay?

If you end up charging off a business debt, you might be able to deduct it from your home business taxes.

What Debts are Deductible on Your Home Business Taxes?

You have to pass a few tests if you want to deduct a charge off. Here are some items to consider before you decide to claim a bad debt on your home business taxes:

  • Bone fide debt. The debt must be enforceable and actually owed to you.
  • Basis. The debt must be included in your income and then charged off. The cash method of accounting counts the income when you're paid. Accrual accounting applies when you get the order or deliver the goods.
  • Debt acquired as part of your business. The bad debt must be related to your business or trade for a charge off.
  • Worthless debt. Show that the client won't repay the debt. If the debt is partially repaid, you can deduct the portion you didn't get. You have to prove to the IRS that you have made efforts to collect. And that they didn't work.

Unfortunately for those of us who provide services, the IRS doesn't allow you to deduct bad debts. If someone hasn't paid you for the time you spent on a project, no deduction. For the most part, you can only deduct your charge off if you are owed for goods. However, you should consult a knowledgeable tax professional for more information on your options.

Deducting Your Bad Debt

Once you have determined that your charge off is eligible for a deduction, it's time to claim it. For the most part, you report bad debt on your home business taxes as “ordinary losses.” Depending on your business setup, you will report these losses on Schedule A, C, or F (choose only one schedule; don't deduct your business losses on multiple schedules).

You should try to deduct your bad debt in the year it became worthless. If the debt is partially worthless, you can deduct that amount now or wait another year until the entire debt is bad and eligible for the deduction. You will need to decide what is best for you on your own or with the help of a professional.

The IRS has helpful information on business bad debts. Consider reading it if you want more information about how to at least offset some of the pain associated with being stiffed on what you're owed.

2 thoughts on “Home Business Taxes: Deducting Business Bad Debts”

Leave a Comment

Your email address will not be published. Required fields are marked *

you MUST enable javascript to be able to comment