Our payment processor failed while holding sales proceeds. Can we deduct the entire unpaid balance?
Merchant Funds Trapped in a Processor Bankruptcy. A specific owner scenario, the facts that change the answer, and the records needed for a tax review.
By AE Tax Advisors Team · Updated October 28, 2026
Determine the legal claim, prior income recognition, tax basis and recovery prospects before claiming a loss. A failed processor does not automatically make the entire screen balance deductible in the failure year.
A specific business-owner situation
A retailer has customer receipts and reserve funds trapped when a processor enters bankruptcy. The merchant may recover part through the estate or insurance. The advisor needs to distinguish sales already recognized from contingent amounts and unsupported dashboard balances.
Illustrative example, not a client result.
What to establish before filing
- Reconcile the claim to transaction records and prior reporting.
- Document rights in held funds and expected recoveries.
- Evaluate applicable loss or bad-debt rules and timing.
Which fact changes the answer?
Segregated funds held for a merchant may create different rights from an unsecured claim against the processor. Obtain the contract and claims information before treating every unpaid dollar identically.
A mistake to avoid
Deducting lost profit or an amount never included in tax basis can overstate the actual deductible loss.
Records that support the decision
- Processor statements.
- Bankruptcy notices.
- Filed claim.
- Prior income and reserve workpapers.
The decision to document
Prepare a claim-basis and recovery schedule. Track distributions from the estate and any later reimbursement against the same workpaper so a supported loss is not counted twice.
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Sources and editorial context
General educational information prepared with AI assistance. No individual professional review is claimed. Apply the relevant tax-year rules to the actual records. Editorial policy · AI disclosure.