Invoicing Tips: Can You Write off Unpaid Invoices?
March 24, 2023 by Invoice Simple
We’ve all been there. You’ve done the work, sent the invoice, and… crickets. Suddenly, that hard-earned money feels a lot further away than it did a few weeks ago.
Despite businesses doing their best to stay on top of payments, the late payment struggle is real. The 2022 Late Payments Report reveals that a whopping 87% of companies are frequently waiting past their invoice due date to receive payment!
So, what can you do if you’re stuck with unpaid invoices? Can you write off unpaid invoices? Let’s explore and find out.
Can You Write off Unpaid Invoices?
There are certain circumstances in which unpaid invoices can be written off. However, determining if the criteria for a write–off has been met can be more complicated than it sounds.
What are the criteria for writing off an unpaid invoice?
To determine whether an unpaid invoice is eligible for a write off, you start by answering a few questions.
Was the invoice recorded in your accounting system?
Knowing when you can write off an unpaid invoice starts with how you record them. When entering invoices into your accounting program, the system will automatically add them to your books and create a paper trail.
However, if you use Word or Google Docs to create invoices, they aren’t being automatically integrated into your financial records. And without a record of the invoices, you won’t be able to write them off.
Was the income from the invoice reported on your tax return?
Being able to write off an unpaid invoice comes down to your accounting method—cash-method accounting vs. accrual-based accounting.
With cash-method accounting, revenue is counted only once it’s been received. So, if you never receive payment, there is nothing to write off.
With accrual-based accounting, revenue is counted once it’s earned. Once it’s been determined that that income won’t be collected, it can be written off.
What is the possibility that the invoice will be paid in the future?
Before you can write off an unpaid invoice, you must show that you’ve taken steps and made a reasonable effort to collect such as making phone calls, sending letters, or even hiring a collection agency.
What proof will help me determine bad debt?
Net 30 may seem like it means 30 business days. However, in the world of invoicing, it typically means an unbroken 30-day period. This includes An unpaid invoice must be considered a bad business debt before it can be written off. To qualify it as bad debt, you must prove that:
- The unpaid invoice is a legitimate business debt—a debt owed by a client for goods or services provided, not personal or investment related.
- The unpaid invoice is worthless—you’ve made reasonable attempts to collect but the debtor has gone bankrupt, out of business, or just refused to pay.
- You’ve suffered an economic loss–According to the IRS, you have a loss only when:
- you have already reported the money owed as business income.
- you paid out cash.
- you made credit sales of inventory that were not paid for.
The IRS has strict guidelines on what it will consider bad debt. So, it is important to make sure you can provide proof of your bad debt. You’ll need documentation of your client’s bankruptcy, death, or refusal to pay.
You will also want to keep records of your attempts to collect payment, including emails and letters sent to the customer. Be sure to keep records that include the invoice number, invoice due date, and however much past due the invoice is.
KEEP READING: What Is Invoice Reconciliation?
How to Write Off Unpaid Invoices
To write off an unpaid invoice, you must show that you paid taxes on income that didn’t exist because you never received it. As we mentioned earlier, writing off unpaid invoices comes down to your accounting method.
Most taxpayers use the cash method of accounting where revenue is only counted once it’s collected. With this method, an unpaid invoice can’t be written off because the revenue from this invoice was never included because it was never received.
It’s only with the accrual-based accounting method that allows for writing off unpaid invoices. Because the revenue was both reported and taxed despite the invoice never getting paid, the IRS will consider it a bad debt and you can write off your unpaid invoices.
KEEP READING: Unpaid Invoices
Other Ways to Deal with Unpaid Invoices
Let’s face it, dealing with unpaid invoices is one of the least fun parts of being a small business owner. But it’s a necessary evil, and there are ways to handle it that don’t involve losing your cool (or your mind).
Use an invoice management system
If you’re still using paper invoices or an Excel spreadsheet to keep track of your customers’ payments, it’s time for an upgrade. Investing in a quality invoice management system will save you time and headaches in the long run.
Not only will it help you keep track of which invoices are outstanding, but many systems also offer features like automated payment reminders and online payment portals.
For many of us, there’s a fine line between being persistent and feeling like a pest. But when you consider that it can take at least five reminders before an invoice is paid, it’s important to follow up repeatedly. If you’re only following up once or twice, you may be leaving money on the table.
Examples of businesses that may want to offer net 30 terms include: If your customers are having trouble paying their invoices on time, offer them some financing options. Providing a payment plan can be a great way to give your customers some breathing room while still getting paid promptly.
KEEP READING: How to Write a Past Due Invoice Email
Use a super simple payment gateway
Another way to prevent unpaid invoices is to make it easy for your customers to pay you on time with a simple payment gateway for your website.
A simple, easy-to-use payment system will allow your customers to both review their invoices online and make payments quickly. A payment gateway can also help you keep track of who owes you money and when the invoice is due.
Need an easier way to get paid?
Give early payment discounts
You can avoid unpaid invoices by offering early payment discounts. Offer customers a small percentage off the total payment if they pay before the invoice due date.
Providing such discounts can both help you get paid promptly and cultivate positive relationships with your customers.
Revisit your invoicing process
If you’re struggling to get paid, see if there are any changes you can make to your invoicing process. Are your invoices clear on what is being charged and why? What would make it easier for customers to pay on time?
Clear and open communication is key to getting paid on time while maintaining good relationships with your customers. Clearly outline your payment terms and late policies in writing and have your customers sign off to minimize any confusion down the line.