Provider guide · Bad debt
Writing off an unpaid invoice: taxes and bookkeeping.
When an invoice won't be paid, writing it off keeps your books honest. This guide covers the tax side and how to record it. General information, not tax or legal advice — check with a tax professional for your situation.
Tax implications
- Accrual basis: you already counted the invoice as income, so a genuinely uncollectible invoice can generally be deducted as a business bad debt in the year it becomes worthless.
- Cash basis: you never reported the income, so there's usually nothing to deduct. Your unpaid labor itself isn't deductible.
- Show it's worthless: keep reminders, demand letters, dispute tickets, agency referrals and any notice the debtor closed or went bankrupt.
- Partial write-offs: business debts can often be partly written off when only some of the amount is recoverable.
- Later recovery: if you're paid after deducting it, report the recovered amount as income that year.
- Sales tax: some states let you reclaim sales tax remitted on an uncollected invoice.
Recording it in accounting software
QuickBooks Online
- Create a "Bad Debt" expense account if you don't have one.
- Create a non-inventory "Bad Debt" product/service linked to that account.
- Issue a credit memo to the customer for the unpaid amount using that item.
- Apply the credit memo to the open invoice so it shows as closed.
QuickBooks Desktop
- Go to Customers → Receive Payments, select the invoice and choose Discounts and Credits.
- Enter the unpaid amount as a discount and set the account to Bad Debt.
Xero
- Open the invoice, choose Options → Add Credit Note, or use "Write off" via a payment to a Bad Debt expense account.
- Allocate the credit note to the invoice so the balance becomes zero.
Spreadsheet or other tools
- Debit a Bad Debt expense; credit Accounts Receivable for the same amount.
- Note the date, invoice number, customer and reason, and keep the evidence file.
Before you write it off
Work through the collections checklist first, and read our collections blog post. A write-off doesn't erase the record — if the unpaid invoice came from a platform, you can still submit a claim. More answers in the collections FAQ.