What Does Writing Off a Bad Debt Mean?

Running a business involves closely watching assets and liabilities. In business, a bad debt is money owed your firm by a person or company that is deemed not collectible. Writing off bad debt is intended to protect a business from paying taxes on funds that have not been received.

Instructions

1. Watch for debts owed to you by people or organizations. Keep in mind that a debt owed is a receivable, which is taxable in some circumstances. In fact, receivables can increase taxation by sitting uncollected.

2. Conduct an intensive search for long overdue receivables (bad debts). Make a final attempt to collect them.

3. Make a decision with respect to the bad debt. You can "write off" a bad debt, which involves taking the value of the debt owed and eschewing taxes against it. It is as though it is not a transaction. In a large corporation, a few receivables "written off" or "charged off" can cause complex problems, so seek guidance from a tax professional before making a final decision.

4. Write off the bad debt by selling it to a collection agency. You may sell the debt at any price, such as 75 cents on the dollar or 50 cents on the dollar. The difference between the original value and what the bad debt is sold for can be written off, though in a larger corporation this may be a capital loss.

Tips & Warnings

• If a bad debt is collected, it becomes taxable as income.

Resources

• The CPA Journal: Bad Debt Deductions (Mayhew)