How to Write Off Receivables: Worthlessness, Reporting, and Records

To write off receivables, you remove a specific uncollectible invoice from your books in the year it becomes worthless and deduct it on your federal return, but only if you previously reported that invoice as income. That last condition is the gate almost every mistake starts at, so it is worth settling before anything else.

Can You Deduct the Receivable at All?

Your accounting method decides this. Accrual-basis taxpayers report income when they earn it, so an unpaid invoice has already been taxed. When it goes bad, you get to deduct it. Cash-basis taxpayers report income only when payment arrives, so an unpaid invoice was never in your income in the first place. There is nothing to write off.

The IRS states this directly: cash-method taxpayers generally cannot take a bad debt deduction for unpaid salaries, wages, rents, fees, interest, or similar items.¹ The exception is money you actually loaned out, because the cash left your hands regardless of method.

The receivables covered here are business receivables — amounts owed to your trade or business, created in the ordinary course of that business.²¹³ If that is your situation, the reporting section below points you to the right form.

When the Receivable Is Considered Worthless

A debt becomes worthless when the surrounding facts show no reasonable expectation of repayment. You do not have to wait until it is technically past due, and you do not have to sue. If a court judgment would be uncollectible, that is enough.¹

The IRS looks at all pertinent evidence, including the debtor’s financial condition and the value of any collateral.⁴ A bankruptcy filing is generally treated as an indication that at least part of an unsecured debt is worthless. Confirmed insolvency, a failed collection agency attempt, returned mail, or evidence the debtor’s business has closed all weigh in your favor.

What you need to have on file:

The original invoice, contract, or promissory note showing the amount and payment terms.
A collection history: call logs, demand letters, records of any third-party collection efforts.
Evidence of the debtor’s financial status, such as bankruptcy filings or proof the business has shut down.
A written determination stating when and why you concluded the debt had no remaining value.

Timing is the single most important element in this file. You must claim the deduction in the year the debt actually became worthless. Guessing or backdating gets deductions disallowed, and by the time the IRS pushes back, the correct year may be closed to amendment.

Partial Write-Offs Are Allowed for Business Debts

You do not have to wait until every dollar is unrecoverable. If you can show that a portion of a business receivable will never be repaid, you can charge off that portion and leave the rest on your books. The charged-off amount cannot exceed the part that is genuinely uncollectible.² Partial write-offs are not available for non-business bad debts; those must be totally worthless before you can deduct anything.¹

Recording the Write-Off on Your Books

For tax purposes, use the specific charge-off method. You identify a particular receivable as worthless, debit bad debt expense, and credit accounts receivable for that customer’s balance. The deduction hits the return in the year that specific debt goes bad.

The reserve method — estimating future losses and deducting a general provision — is not available to most businesses. It remains only for certain banks and thrift institutions supervised by federal or state authorities.⁵

If your financial statements follow GAAP, you will separately maintain an allowance for doubtful accounts on those statements. Your book and tax figures will differ in most years. That is normal; just track the differences.

Where to Report the Deduction

Sole Proprietors and Single-Member LLCs

Report the write-off on Schedule C (Form 1040), Part V, Other Expenses (line 48), which flows to line 27b. Include debts from sales or services that were previously included in income and are definitely known to be worthless, describing each separately.⁶

C Corporations

Report on Form 1120, line 15, entering the total debts that became worthless in whole or in part during the tax year.⁷ A cash-method corporation still cannot deduct unless the amount was previously included in income.

Non-Business Bad Debts

If what you are writing off is a personal loan rather than a business receivable, report it on Form 8949, Part I, Box C. Enter a description in column (a), the worthless amount as your basis in column (e), and $0 as proceeds.⁸ The loss carries to Schedule D and is subject to the $3,000 annual capital loss limitation.³

Keep the Records for Seven Years

The normal three-year retention rule does not apply. The IRS requires you to keep records supporting a bad debt deduction for seven years.⁹ This tracks the statute of limitations: a claim for credit or refund related to a bad debt deduction can be filed within seven years of the return due date, rather than the usual three.¹⁰ Hold the original agreement, collection records, worthlessness documentation, and the return claiming the deduction for the full seven years.

What Happens if the Customer Later Pays

Sometimes a debtor you wrote off comes through. Any amount you recover on a previously deducted bad debt generally goes into gross income in the year you collect it. The Schedule C instructions state this directly: if you later collect a debt that you deducted as a bad debt, include it as income in the year collected.⁶

The tax benefit rule under IRC §111 provides a narrow escape: you only report the recovery to the extent the original deduction actually reduced your tax.¹¹ If the deduction fell in a loss year and produced no benefit, the recovery is not taxable. For most profitable businesses this rarely helps, but check it if you had a down year.

Mistakes That Get Write-Offs Denied

Claiming the deduction in the wrong year. Too early or too late and the IRS can disallow it entirely, often after the correct year is closed.
No collection effort. Writing off an invoice the moment it goes past due, without any attempt to collect, will not survive scrutiny.
Deducting an invoice you never reported as income. This is the cash-basis trap and the single most common small-business error.
Treating a family loan as a bad debt without documentation. Without a written agreement, terms, and evidence of a real debtor-creditor relationship, the IRS treats it as a gift.¹²
Tossing records at year three. The retention period is seven, and the questions often come in years five and six.

1
Internal Revenue Service. Topic No. 453, Bad Debt Deduction
2
Office of the Law Revision Counsel. 26 USC 166 – Bad Debts
3
Office of the Law Revision Counsel. 26 USC 1211 – Limitation on Capital Losses
4
eCFR. 26 CFR 1.166-2 – Evidence of Worthlessness
5
eCFR. 26 CFR 1.166-4 – Reserve for Bad Debts
6
Internal Revenue Service. Instructions for Schedule C (Form 1040)
7
Internal Revenue Service. 2025 Instructions for Form 1120
8
Internal Revenue Service. Instructions for Form 8949
9
Internal Revenue Service. How Long Should I Keep Records?
10
Office of the Law Revision Counsel. 26 USC 6511 – Limitations on Credit or Refund
11
Office of the Law Revision Counsel. 26 USC 111 – Recovery of Tax Benefit Items
12
eCFR. 26 CFR 1.166-1 – Bad Debts