Can I Deduct Unpaid Invoices?

Let’s talk about something every business owner has experienced at least once:

You did the work.
You sent the invoice.
And… crickets.

Late payments. Ghosted clients. “The check is in the mail.”

It’s frustrating — especially when you’ve already paid your own expenses, payroll, or vendors. So the natural question becomes:

Can I at least deduct the unpaid invoice on my taxes?

The answer?
It depends on your accounting method.

Cash vs. Accrual — This Is Everything

There are two primary accounting methods used for tax reporting:

💵 Cash Basis

Most small businesses use this method.
You report income when you receive it and deduct expenses when you pay them.

📊 Accrual Basis

You report income when you earn it (when the service is provided or the product delivered), even if you haven’t been paid yet.

That distinction determines whether an unpaid invoice can become a deduction.

Example 1: Cash-Basis Business

Joe is a plumber who uses the cash method.

In December, he invoices a client $2,000 for replacing a water heater. The client disappears and never pays.

Since Joe never received the $2,000, he never reported it as income.

And here’s the key:
👉 You can’t deduct income you never reported.

For Joe, there’s no deduction because there was never taxable income to begin with.

Example 2: Accrual-Basis Business

Joanna is a painter who uses the accrual method.

She invoices $1,500 in December and properly reports it as income — even though she hasn’t been paid yet.

The client never pays.

Because Joanna already paid taxes on that $1,500, she may be able to deduct it later as a bad debt — assuming it meets IRS requirements.

This is the big difference.

When Can You Deduct an Unpaid Invoice?

The IRS allows a bad debt deduction only if the debt is truly worthless.

That means:

✔️ You already included it in income
✔️ You made reasonable attempts to collect
✔️ There is no realistic chance of repayment

“Reasonable attempts” could include:

• Repeated follow-ups

• Collection efforts

• Evidence of bankruptcy

• The client disappearing

You don’t need to sue someone — but you do need to show it wasn’t just casually written off.

What You Can’t Do

You cannot:

• Deduct unpaid invoices if you use the cash basis

• Write off income just because it’s late

• Claim a bad debt without documentation

The IRS expects proof that the debt truly became uncollectible.

Bottom Line

If you’re a cash-basis taxpayer, unpaid invoices are frustrating — but not deductible.

If you’re accrual-based and you already reported the income, you may qualify for a bad debt deduction — but only if the debt is actually worthless and properly documented.

Before writing anything off, make sure you understand which accounting method you’re using and whether the IRS requirements are met.

👉 If you’re unsure how your bookkeeping method affects your tax deductions, book a call with Lisa Brugman, EA & Associates. We’ll review your structure, clean up the reporting if needed, and make sure you’re not missing deductions — or creating audit risk.