How to Write Off Bad Debt
Are you a new entrepreneur? If yes, learning about Bad Debts is really important!
What is Bad Debt ?
When a business suffers loss due to worthless debt which is either created or acquired by the other business, then it is known as Bad Debt.
It is of no use when it is difficult to collect the amount which is owed.
Customer credit sales are amongst the bad business debt which small businesses might face. Besides, loans to suppliers or clients for business objectives, Business loan are also other form of bad debts.
How to Write Off Bad Debt?
But fortunately you can write off all the bad debts while filing taxes. As a business owner, it is quite obvious you would never want to acquire indebtedness. It is suggested to avoid as much as you can via proper billing as well as collection practices. If the entrepreneur is unable to collect the payments from the customer or clients, the amount becomes bad debt write off.
It is really important to write off the bad debt after understanding whether your venture is eligible to do it or not. If you, as a owner wants to eliminate the indebtedness then it is important to show you put forth efforts to collect the money owed. You need to mention the amount which was unable to collect and end the further attempts made for collection. Additionally, you need to show the uncollected amount in income and due to this accounting method is equally important as it will affect whether the owner can or cannot deduct the debts.
For an instance if you are using cash method of accounting then you cannot deduct the debts as you haven’t entered the income until it is received. The method is accrual method where all billing is treated as income irrespective of the fact you have collected it or not. As the indebtedness is entered as income which can be written off.
How to claim bad debt on taxes ?
There are two options of writing off the debts i.e. write off directly also known as specific charge off method and other method is non-accrual experience method. For applying the non-accrual experience method, your venture should qualify by receiving the amount from the services rendered.
We will help you in learning about the two methods. For further details about how to write off the amounts not received, keep reading Fundlime.