Before you write anything off, you need to know whether your accounting method even makes bad debt relevant. If your business uses the cash basis of accounting (which most small businesses do), you only record income when you actually receive payment. Since you never recorded the unpaid invoice as income, there’s nothing to write off. You can’t deduct money you never reported earning. Bad debt write-offs primarily apply to accrual-basis businesses, which record income when the invoice is sent regardless of whether payment has come in.

If you are on the accrual basis, the general rule is to write off an invoice when you’ve made reasonable efforts to collect and have concluded the customer is unable or unwilling to pay. There’s no single deadline the IRS requires, but most businesses treat invoices as candidates for write-off once they’re 90 to 180 days past due and collection attempts have failed. The key word is “reasonable.” You need to show that you actually tried to get paid, not that you just gave up after one reminder email.

Document your collection efforts. Send follow-up invoices, make phone calls, send written demands, and keep records of all of it. If the amount is large enough, consider sending a formal demand letter or using a collection agency. These steps matter both for actually recovering the money and for supporting the deduction if the IRS ever asks about it.

When you’re ready to write off the invoice, record it as a bad debt expense in your books. In QuickBooks Online, you can create a credit memo against the original invoice and apply it to a bad debt expense account. This removes the receivable from your balance sheet and records the loss on your profit and loss statement. If you handle your own invoicing and payment tracking, make sure the write-off is recorded correctly so your accounts receivable balance stays accurate.

For tax purposes, the IRS distinguishes between business bad debts and non-business bad debts. Business bad debts from goods or services you sold are deducted as ordinary losses on your tax return. You’ll want to confirm the timing and treatment with your tax preparer since the rules around partial write-offs and recovery of previously written-off debts can get specific.

One thing to watch for is patterns. If you’re writing off bad debt regularly, that’s a sign your credit and collection process needs attention. Consider requiring deposits, shortening payment terms, or following up on overdue invoices sooner. A QuickBooks ProAdvisor in Long Beach can help you set up aging reports that flag overdue invoices before they become uncollectible, so you’re addressing the problem early instead of writing it off later.