Bad Debt: Try to Collect or Write it Off?

The best-case scenario for handling uncollected debt is to work out something with your customer in order to get paid. Over the last few years, however, your business may have experienced an increased level of past due receivables. Customers with past due receivables themselves are prioritizing who to pay, how much and when. Your business may not be their top priority.Past due receivables not only make an impact on cash flow, they also impact the value of your business and your ability to access financing. If you can’t work out a solution with your customer (due to a dispute or bankruptcy, for example), and it’s not deemed worth the expense of collections or a lawsuit, you may consider writing off the debt.A business taxpayer may deduct business bad debts if the receivable becomes partially or completely worthless during the tax year. To be entitled to a business debt write off, the taxpayer must make a “reasonable” attempt to collect the debt. However, the IRS doesn’t require the taxpayer to turn the debt over to a collection agency or file a lawsuit — if doing so has little probability of success.Keep in mind that the IRS will look more carefully at a bad debt write-off stemming from a family member than from a non-family debtor.The deduction allowed for bad debts is an ordinary deduction, which can offset regular business income dollar for dollar. In general, most business taxpayers must use the specific charge-off method to account for bad debts. The deduction in any case is limited to the taxpayer's adjusted basis in the receivable.There are deadlines for claiming a write off for any past business bad debt. Taxpayers have until the later of (1) seven years from the date they timely filed their tax return or (2) two years from the time they paid the tax. Within that time, they could claim a refund for a deduction for a wholly worthless debt not deducted on the original return.If you have any questions regarding the status of your receivables and if some should be categorized as uncollectible bad debt, contact HG&K. We can provide guidance on receivables and collections solutions as well as the proper process for qualifying and writing off bad debt. Streamlined and timely receivables support a higher value for your business.