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Additional information and exceptions may apply. This content is for information purposes only and should not be considered legal, accounting, or tax advice, or a substitute for obtaining such advice specific to your business. If you collected a portion of the debt, you can claim it to be partially worthless and only write off the portion you were unable to collect as long as the full debt was included on your books. You can do this by documenting your attempts to collect, showing the customer filed bankruptcy, or whatever else leads you to believe that the debt is uncollectable. To do this, you’ll need to show you took reasonable steps to collect the debt and have no chance of being repaid. Simply showing that a customer or other business ordered products or services from you and you expected payment for it should satisfy this requirement.įinally, you will have to prove the debt is worthless. You will then need to show the IRS the debt is related to your business. But if you count the income on your books in January, you do. For example, if you sell a customer a product in January and wait until he pays you in March to add it to your books, you don’t have a basis in the debt. But if you use the accrual method, where you count the income when an order is placed or when you deliver the product or service, you do qualify. If you use the cash method, where you don’t count income until you receive payment, the debt won’t qualify as bad because it was never on your books as income. Next, you have to show you have a basis in the debt, which means you have already counted the debt in your business’ gross income. If you provided the customer with goods or services in return for expected payment, or had a contract with them, it qualifies the debt as bona fide. That means the debt arose from a valid obligation of the customer to pay you. First, you must show that it is bona fide. In order to do that, you have to be able to prove four things about the debt. In order to write off an uncollectable receivable, it must qualify as a bad debt in the eyes of the IRS.