Before you write anything off, you need to know whether you use cash basis or accrual basis accounting. This changes everything about how a bad debt write-off works.

If you’re on cash basis, you only record income when you actually receive payment. An unpaid invoice was never recorded as income in the first place, so there’s nothing to deduct. You can remove the invoice from your books to keep things clean, but it won’t reduce your taxable income. Most small businesses are on cash basis, which means a bad debt write-off is really just housekeeping.

If you’re on accrual basis, you recorded the revenue when you sent the invoice. That means you’ve already paid taxes on money you never collected. Writing it off as bad debt gives you a deduction that offsets the income you previously recognized. In this case the write-off has real tax impact and the IRS requires you to show that the debt is genuinely uncollectible.

As for timing, most businesses consider an invoice bad debt after 90 to 120 days of non-payment. There’s no hard legal deadline, but the longer an invoice goes unpaid, the less likely you are to collect. After 90 days, the probability of collection drops significantly.

Don’t jump straight to a write-off without attempting to collect. Document your efforts. Send reminder emails, make phone calls, send a formal demand letter. If the amount justifies it, consider a collections agency or small claims court. The IRS expects you to demonstrate that you made reasonable attempts to collect before claiming a bad debt deduction. A single invoice with no follow-up doesn’t meet that standard.

When you’re ready to write it off, record it against a bad debt expense account in your books. In QuickBooks, you can create a credit memo against the original invoice and apply it to a bad debt expense account. This closes out the open invoicing item so your accounts receivable reflects what you actually expect to collect.

Review your aging report monthly. If you consistently see the same clients stretching past 60 or 90 days, the problem isn’t bad debt. It’s your collection process or your client selection. A bookkeeper in Pearland can help you set up aging reports and a write-off policy so unpaid invoices don’t sit in your books indefinitely, inflating your receivables and giving you a false picture of your cash position.

One more thing to keep in mind. If you write off an invoice and the client eventually pays, you need to record that as income in the period you receive it. The write-off isn’t permanent if the money shows up later.