Finance

Bad Debt? Get a Tax Break

In a troubled economy, every penny counts. So take advantage of these tax savings.
Magazine Contributor
Owner of Make a Living Writing
2 min read

This story appears in the December 2008 issue of Entrepreneur. Subscribe »

It happens to nearly every business sooner or later: A customer makes a purchase on credit, then never pays up; or a vendor loans a customer money to help keep the customer's business afloat, but the company goes under anyway. The only good thing about bad debts is that you can turn them into a tax break.

First off, the bad debt must be directly related to operating your business, says Frederick W. Daily, author of Tax Savvy for Small Business; nonbusiness bad debts generally aren't tax-deductible. Note that you only take a bad-debt deduction if you previously recorded the amount owed as income received. If you have not previously included the uncollected amount in income, you don't get to deduct the bad debt.

However, you still get to deduct your cost for the goods at issue. Be sure to include the cost of goods sold for unpaid merchandise in your total for "cost of goods sold" on your tax form to help reduce your gross income.

Not every bad debt can be turned around, though: If you are in a service business and don't have much in the way of cost of goods, you're out of luck here. Also, unfortunately, only the cost of goods is deductible, not the full retail price you charged the deadbeat customer.

More from Entrepreneur

Grow Your Business at Entrepreneur LIVE! Join us on Nov. 16 in Brooklyn, NY, to learn from legends like Danica Patrick and Maria Sharapova, pitch our editors, meet with investors, and potentially walk away with funding!
Register here

One-on-one online sessions with our experts can help you start a business, grow your business, build your brand, fundraise and more.
Book Your Session

Whether you are launching or growing a business, we have all the business tools you need to take your business to the next level, in one place.
Enroll Now

Latest on Entrepreneur

My Queue

There are no Videos in your queue.

Click on the Add to next to any video to save to your queue.

There are no Articles in your queue.

Click on the Add to next to any article to save to your queue.

There are no Podcasts in your queue.

Click on the Add to next to any podcast episode to save to your queue.

You're not following any authors.

Click the Follow button on any author page to keep up with the latest content from your favorite authors.