Can a cash-basis business deduct unpaid customer invoices?
A cash-method business generally does not recognize an unpaid invoice as income and therefore generally has no bad-debt deduction when it goes uncollected.
The tax treatment
A cash-method business generally does not recognize an unpaid invoice as income and therefore generally has no bad-debt deduction when it goes uncollected. This is a federal income tax starting point; the contract, ownership, accounting method, and actual use can change the result. State and local treatment should be checked separately.
The decision to make before filing
Confirm whether any part was previously reported, such as a deposit or a prior-year receipt. The useful planning step is to resolve the classification while the underlying documents are still available, then reconcile it to the books and the prior-year return. If the transaction spans more than one year, track the opening balance and what happened to it afterward.
Illustrative example
A consultant using the cash method sends an invoice in December but the client never pays. The invoice was never taxable cash receipt, so there is usually no separate bad-debt deduction for its face amount. Collection fees actually paid are a different expense.
Records that support the position
Keep invoice history, payment record, and tax method documentation. Tie amounts on the return to bank activity and the agreement. When several assets, people, or uses are involved, write down the allocation method and apply it consistently. A short dated workpaper is easier to defend than a reconstructed explanation years later.
A common reporting error
Deducting an invoice never included in taxable income claims a loss that never arose for tax purposes. Review both sides of the entry: a payment can affect income, basis, liability, or an expense at different times. A correct cash total alone does not establish the correct tax character.
Where to verify the rule
Start with IRS Publication 946: How To Depreciate Property. Its examples and cross-references explain the underlying federal rule; check the current version and any later IRS guidance for the year at issue. For a coordinated review of related deductions and limitations, see Business tax planning.
Related Reading
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