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Can I write off outstanding balance as bad debt?

Can I write off outstanding balance as bad debt?

Question: I am a self-employed gardener. One of my customers moved out-of-state without paying his outstanding balance. He owes me a $1,000 for a couple months of gardening service and $500 for the cost of some shrubs and flowers. I know where to list the $500 as an expense, but where do I show the $1,000 as a bad debt in my bookkeeping? I am a cash basis business. 

Answer: You are not going to like the answer. Unfortunately, you cannot deduct what has not yet been received as income. Let's assume that your deadbeat customer was your only account for the year and owed you $1,000 for your labor services when he took off. Since a payment was never received, the income on your books for the year would be zero. If you were to write-off the $1,000 as a bad debt, you would be claiming a $1,000 loss, which is clearly not the case. So even though you expended your energy servicing this customer, you cannot have a bad debt for an amount that was not paid.

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Lee Reams, BSME, EA

Lee Reams, BSME, EA

Editor-in-Chief

Besides his role at CountingWorks as an educator and speaker to thousands of accountants nationwide, Lee manages a technical research service for a large group of tax accountants which sharpens his technical skills. Lee served on the Board of Blackline Systems, is a former Board of Director for the California Tax Education Council, is a Past President of the San Fernando Valley Chapter of Enrolled Agents, Member and Past Director for the California Society of Enrolled Agents.

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