Deducting Bad Debts - Cash Basis

I operate on a cash basis, recording income as received regardless of when or how much is billed, sole proprietorship.

I have had some invoices turn into bad debts recently.

It is my understanding that I cannot deduct these loses, since I never recognized the income as an accrual based business would have. However, a friend of mine (also in business on a cash basis, sole prop) says that he deducts his loses due to bad debts.

Who is correct?

Thanks,

Reply to
Another Poster
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You are.

Reply to
Stuart A. Bronstein

You are, of course. However, one can never be certain what one is being told. Perhaps your friend is filing his taxes incorrectly, or perhaps he is referring to the fact that he is "writing off" these deadbeat invoices in his accounting program so they no longer show as owing, but filing his taxes correctly based on income received.

Reply to
Reggie

Thanks all. While I like being correct, it would have been nice to deduct them :-).

I don't think he's in the "write them off" verbiage category. I think he's really deducting them. We will have to have a talk.

(As I side note, I love it when someone say "but you don't have to pay for that, right? It's just a business write off" :-)

Reply to
Another Poster

That ranks right up there with "Oh, you have your own business - that must be great! You can take as much vacation as you want whenever you want to!"

Reply to
Pico Rico

Well, it is a business write-off, in a sense. You just can't write it off twice, which is what he was really talking about doing.

Reply to
Stuart A. Bronstein

Yeah... my subtle point is that they think a "write off" means "free" and that you save 100% of the expense, when it's really just a discount off purchase price at your tax rate.

Reply to
Another Poster

My father ran his own business, and my mother did the books and taxes, though she was completely untrained to do either task.

She knew that supplies are written off and equipment was depreciated. So on the taxes she would depreciate equipment, and then also write it off.

Over more than 20 years the business was audited twice by the IRS, and neither time were those double deductions ever either an issue or even discovered.

Reply to
Stuart A. Bronstein

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