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Ask The Experts: Delinquent Accounts
Read this article in PDF form here.
Q: I have a few delinquent accounts receivable for my business. Can my company receive a tax break for people who don’t pay? We’ve been blessed to only have a small handful of them in the 14 years we’ve been in business, amazingly.
A: Unfortunately, the uncollected fees from services will not end up creating any additional deduction. The key point here is that the fees were never actually recorded as taxable income and therefore there would be nothing to write them off against. This assumes of course that you report your taxes on a cash basis, which means you only recognize the income once you actually get the cash.
This may seem unfair, but consider this: If you could write off amounts that people just chose not to pay, you could bill every client for twice the amount you expected them to pay. Then you would always have a writeoff equal to the amount that they actually paid and never pay any tax at all. I hate to use the words “logic” and “IRS” in the same sentence, but the logic is that since no income was recognized there would be no writeoff simply because they didn’t pay.
Any direct costs that you incurred to provide the services or to collect the fees would still be deductible, however.
Keith Hall, NASE Tax Expert