Step-By-Step Guide To Write Off Unpaid Customer Invoices

Well, it’s not easy for one to deny that unpaid invoices can wreak havoc on your business. An unpaid invoice signifies that you’re not getting paid for the products or services that you provided to a user. And, this results in cash flow problems. One won’t be able to make investments in a timely manner that will keep the business growing without this capital. Therefore, having lots of unpaid invoices on your books means that you might be paying tax on income that you haven’t received yet. Again, that's something that is going out the door and you won’t be able to reinvest in new or updated equipment, fresh inventory, and other necessary expenses. Thus, you should look for a way that can work on creating a system that minimizes unpaid customer invoices. Many times, you might get stuck in a situation where you would be unable to send invoices in QuickBooks. For situations where unpaid invoices become unavoidable, you’ll need to know how to write off unpaid professional invoices.

Steps You Must Take When Writing Off Unpaid Invoices

Make sure to follow the below-given steps if you want to dismiss any of your unpaid invoices:

1. Determine Your Eligibility

As per the IRS, if you use cash-method accounting you won’t be able to write off unpaid invoices. It’s because when you use the cash method of accounting, you only count revenue when you receive it. However, with an unpaid invoice, you never receive revenue, so you have no revenue from which to write off the unpaid invoice. Accrual-based accounting, on the other hand, provides you income when you earn it. However, once you get to know that you’re not getting paid for that invoice, you need to write it off as a bad debt so that you don’t pay more tax than you should.

2. Qualify Your Unpaid Invoices as Bad Business Debt

The way you write off unpaid customer invoices will depend on your tax status. However, before you figure out the logistics of writing off your invoice, you need to make sure that the unpaid invoice qualifies as what the IRS calls a “bad business debt.” An overdue invoice isn’t automatically a bad business debt. In fact, you must be able to prove that the unpaid invoice is worthless, that it’s related to your small business, and that you suffered an economic loss. If you can’t prove all three statements are true, the IRS won’t consider your unpaid invoice to be a bad debt, which means you can’t write it off. Besides, you might come across situations like unable to write invoices in QuickBooks, that you may resolve by following certain steps.

3. Assemble the Proof

When it comes to writing off bad debt, the IRS is very strict about it. Thus, you need to make sure that you have a strong basis from which to claim that your unpaid invoices are eligible to be written off. To prove that the invoice is worthless, you’ll need documentation that your customer went bankrupt, died, or otherwise won’t pay you. You should also keep track of your efforts, including emails and letters, to collect the outstanding invoice. In addition, be sure to provide the invoice number, what the invoice’s due date was, and how overdue it is at this time. In some cases, it may be smart to hire a collection agency.

Proving that you suffered an economic loss is straightforward if you used the accrual basis for accounting. Still, you should have documentation of the business income you reported that has become the bad debt you’re claiming. Finally, to prove your unpaid invoice is a business debt, your client must have had a legal obligation to pay you. Any contract documents that you have with your client should be sufficient as proof of a legal obligation.

4. Write Off the Bad Debt

Once you’ve determined that an unpaid invoice is worthless, you can write it off when it comes time to file taxes. If an unpaid invoice from a previous year becomes worthless, you’ll have to file an amended return for a refund of the tax you paid.

Conclusion

Hopefully the information provided would have helped you to write off unpaid invoices without any hassle. However, if you ever come across any issue while doing that or if you become unable to send invoices in QuickBooks, then we would suggest you to connect with our QuickBooks Data Services Solutions Team.