Bad Debt
Bad debt is money owed to your business that you've determined is uncollectible. When a customer can't or won't pay an invoice, that receivable becomes bad debt — a loss that you can write off as a business expense on your taxes.
Bad Debt Definition
Bad debt is money owed to your business that you've determined is uncollectible. When a customer can't or won't pay an invoice, that receivable becomes bad debt — a loss that you can write off as a business expense on your taxes.
Bad Debt in Practice
A consulting firm sends a $15,000 invoice to a client. After 90 days of follow-ups, the client goes radio silent. After six months and a final collection attempt, the firm writes off the $15,000 as bad debt. They deduct it as a business expense and adjust their accounts receivable.
Why It Matters
Bad debt directly reduces your bottom line. A single large unpaid invoice can wipe out the profit from several successful projects. For small businesses operating on thin margins, bad debt management is survival-critical.
Prevention is the best strategy: vet new clients, require deposits for large projects, set clear payment terms, and follow up on overdue invoices promptly. When bad debt does happen, write it off quickly and learn from it.
FAQ
Q: Can I deduct bad debt on my taxes?
A: Yes, if you use accrual accounting and previously reported the income. You can deduct the uncollectible amount as a business bad debt expense.
Related Terms
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Related Terms
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