How to Write Off Unpaid Invoices in a Sole Proprietorship

Uncollected invoices may reduce your taxes.
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As a small-business owner, you rely on people paying their invoices to keep your business going. But some people fail to pay; they might go out of business, declare bankruptcy or leave town, making collecting the debt almost impossible. The IRS classifies unpaid invoices as bad debts. You can deduct these invoices from your taxes if you use the accrual method of accounting – that is, you claim income when you earn it, not when you're actually paid. If you use the cash method of accounting, claiming income only when you receive payment, you can't write off a bad debt, since you never claimed that income on your taxes.


Step 1

Determine if the debt is partly or totally worthless. For instance, if the client paid part of the invoice, then disappeared, died or otherwise made it impossible for you to collect the debt, the debt is partially worthless. You can only take the portion of the invoice you're unable to collect.


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Step 2

List the bad debt as an expense on Schedule C, Profit or Loss From Business. List the uncollected invoice as an ordinary loss in Part V of Schedule C, Other Expenses. List the total of all Other Expenses on line 27A of Schedule C.

Step 3

File an amended return if the invoice becomes worthless after you've already filed your tax return for the year. Use form 1040X, Amended U.S. Individual Income Tax Return. List the uncollectable invoice as a business expense not claimed on your original Schedule C. If the unpaid invoice deduction results in you owing less tax than you paid, the IRS will issue a refund.



If you claim a deduction for a bad debt and the client later pays the invoice, you may have to claim the payment under Other Income on your Schedule C.

Deduct the bad debt in the year it becomes worthless, but no more than seven years from the date of the return on which you claimed the invoice as income.



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