Write-Off Debt

Let's break it down into bite-sized pieces. First, we'll look at what a write-off means. Then we'll discuss the benefits of writing off debt. Finally, we'll spend a moment on practice.



Although a business writes off bad debt as a loss, that does not relieve the debtor's obligation to pay the bill. Writing off debt is not a waiver by the business of its right to the money owed.

The term “write-off” is truly an accounting term.

As a business decides that it has little or no chance of collecting a debt, it will write it off as a loss. What it means is that the business doesn’t count the money owed to them as an asset of the company anymore, and it will reflect on the profit-and-loss statement of a business as a loss.


Why would a business write off debt?

When companies write off debts, then many times get to deduct the unpaid balance as a loss on its financial statements and tax returns. This will lower taxable income and result in a reduced tax liability.


Are debtors still liable for a debt after It Is written off?

Although a business writes off bad debt as a loss, that does not relieve the debtor's obligation to pay the bill. Writing off debt is not a waiver by the business of its right to the money owed.

Since a creditor retains its right to pursue Its debt, it can still take certain steps to collect the debt. A creditor, or collection agency, may even sue a debtor for the amount due, and with a judgment, the creditor or collection agency may be able to seize personal or business assets to satisfy the debt. However, if a creditor or collection agency successfully collects the money, you will owe taxes on the amount collected.


Report uncollected monies to the IRS as lost income.

Your accounting method will much affect whether or not you can deduct bad debt.

If your business uses the cash method of accounting, you generally cannot deduct a bad debt, because income is not reported until it is received.

However, the other method of accounting is the accrual method (used by most midsize businesses). With this method, all Accounts Receivables are treated as income, regardless of whether you have collected the money or not. Because the debt has been recorded as income you should be able to write it off.


Before you write-off.

When a business wants to write off bad debt, it must show that efforts were made to collect the money owed. To show that a debt is worthless, you must show that you've taken reasonable steps to collect the debt. Generally, some warning signs that a debt may be uncollectible would include if a company refusing to answer communication, a company stating that they will not pay, or a company simply disappearing.

Once you have turned a debt over to a collection agency, you are also justified in writing it off on your taxes.


The information contained in this article is not tax or legal advice and is not a substitute for such advice. State and federal laws change frequently, and the information in this article may not reflect your own state’s laws or the most recent changes to the law. For current tax or legal advice, please consult with an accountant or an attorney.

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