Bad Debts with Cash Accounting?

"Another Poster" wrote

You can't take a deduction for something that hasn't been lost. Since you never booked the income, there isn't a loss to deduct. If you don't write the check, you can't take a deduction. If you never pay for your asset, you can't depreciate it.

Cash basis means it's only income when you receive it. If you never receive it, it's never income, so you can't take a bad debt deduction for income never received.

A bad debt expense is rare in a cash basis business. When it does happen it is usually because of acharge back on a credit card or a bounced check. Even under those circumstances there is enough time to determine that nothing was received so you son't book the revenue.

I've had clients who would insist that it was a bad debt expense. One CPA I worked for years ago gave in to a client because the client was wasting too much time arguing. We increased revenues by the bad debt expense so that the bottom line was still accurate. The tax return was then correct and the client wasn't astute enough to figure out what happened. The amount was small enough so that if the client wanted to sell his business, his revenues weren't too distorted.

This question comes from one type of client so much that some CPAs refer to it as the "doctor's question."

Gary

Thanks, that was my assumption, but some others have held the opposite opinion and I wanted to make sure I was singing from the right pew.

Thanks, ~~~~~~~~~~~~ Suppose you bill $10000 but only collect $ 5000. Then you record the $ 5000 you collected as income and deduct the $ 5000 bad debt, you would then show zero as income. Obviously that would not be allowable. If you had recorded the whole $ 10000 as income (accrual basis) then it would be a legitimate deduction.