Whenever you’re doing business with someone, you expect them to pay you what they owe. However, that isn’t always the way it works in the real world. This can leave businesses with bad debt that is a loss for their company. When your business is faced with this dilemma, it is important that you know what you need to do to write it off on your taxes. Propel Your Accounting is here to walk you through the process of writing off bad debt.
How to Write Off Bad Debt
When you are owed money that someone isn’t paying you back, it is in your best interest to write it off as bad debt. This means that you’re adjusting your books to show the real amounts of your current accounts. You need to remove the bad debt from your accounts receivable. There are a couple of different ways to write off bad debt.
– Direct Write-Off Method: After the accounts receivable has been recorded, the direct write-off method involves crediting the accounts receivable and debit the bad debts expense so that you can write it off.
– Allowance Method: If you are fairly sure that you aren’t going to be paid by those that owe you money, you can debit bad debts expense and credit allowance allowance for these doubtful accounts. Using this method, you can look at the past year to predict the bad debts that you will have this year. This allows you to set aside money for your bad debt reserve. When you use the allowance method, it helps you to make better plans because you have a more accurate picture of books.
Claiming Bad Debts on Taxes
There are a couple of ways that you can claim bad debts on your taxes when it is included in your gross income. This can help reduce your tax liability with the IRS.
– Specific Charge-Off Method: Sometimes you have debtors that are considered to be partly worthless because they have paid part of the debt they owed, back to you. Other debtors are considered to be completely worthless because they have paid nothing toward the debt they owe. You can only deduct the amount that you charged off on your books.
– Nonaccural-Experience Method: If you use accrual accounting, you can use this method. You also have to have have an average of less than $5 million in gross receipts for previous years. This method is set aside for those that provide services in the following professions: accounting, architecture, consulting, engineering, actuarial science, law, health and performing arts.
Bookkeeping, Accounting, Business Consulting & HR / Admin Services in the United States of America
If you are struggling with bad debt and aren’t sure how to handle it when it comes to claiming it on your taxes, you can turn to Propel Your Accounting to help you get it all sorted out. We will help you prepare your taxes to ensure you aren’t leaving any money on the table with the IRS. Call us today!
