Bookkeeping
When an invoice will never be paid: writing off a bad debt
How to tell when an unpaid invoice has become a bad debt, what to try first, how a write-off works in your books, why it is not the same as a credit note, and the tax relief many countries allow, in general terms.
11 Nov 2026 · 7 min read
Marcus runs a lighting hire company in Denver. An events firm owes him $4,800 from March. He has sent reminders, a statement and a final notice. In November he learns the company has been dissolved, with nothing left for small creditors. The money is gone. What is left is a bookkeeping question: how to stop counting $4,800 as something he is owed, and whether he can get any tax back.
Is it really a bad debt?
A bad debt is an amount you are owed and have decided, with good reason, will not be paid. Slow payers and disputed invoices are not bad debts yet. Signs that it has reached that point:
| Sign | What it usually means |
|---|---|
| The customer is insolvent, in liquidation or dissolved | Usually a bad debt, unless you can claim in the insolvency |
| They have stopped replying, and you cannot find them | Likely a bad debt once your chasing is done |
| Collecting would cost more than the debt | A business decision to stop, then write off |
| The time limit for taking legal action has passed | You may no longer be able to enforce it |
| They are paying slowly, or disputing a part | Not yet a bad debt. Agree a plan, or settle the dispute |
What to try before writing it off
- Reminders on a schedule, then a phone call. Many “bad” debts are invoices that went to the wrong person.
- A statement of account showing everything owed, by age. See statements of account.
- A payment plan for a customer who wants to pay but cannot pay at once. See payment plans.
- A settlement: accept part of the amount in full and final payment, in writing.
- A final notice, then a small claims court or a collection agency, if the amount justifies the cost.
- A claim in the insolvency, if the customer is in administration or liquidation. Small creditors often get little, but it costs little to file.
The full plan for chasing is in collecting unpaid invoices. Keep a record of every step: it is your evidence that the debt really was bad, which a tax office may ask for.
How a write-off works
Writing off is an entry in your books, not a change to the invoice. Your accountant moves the amount out of what customers owe you and into an expense, usually called bad debts. Your profit goes down by that amount, which is right: you made the sale and never got the money. The invoice itself stays exactly as issued, with its number, its tax and its date. You do not delete it or cancel it.
A write-off is not a credit note
| Write-off | Credit note | |
|---|---|---|
| What it says | The sale happened; you will not be paid | The sale changed; less is owed |
| Who decides | You, in your own books | You and the customer, usually by agreement |
| Does the customer get a document? | No | Yes |
| If they pay later | Record it as a bad debt recovered | The credit note stands |
If you agree with the customer to accept less, the forgiven part is a change to the sale, and a credit note is the right document. See also credit notes. If they simply do not pay, the sale has not changed, and many tax systems treat a credit note there as the wrong tool. Ask your accountant which applies.
Tax relief, in general terms
Two taxes are affected: the tax on your profit, and any VAT, GST or sales tax you charged on the invoice. The rules vary a lot, so take these as examples at the time of writing, and check with your accountant or tax office.
- Income or profit tax. If you counted the sale as income when you invoiced it, a genuine bad debt can usually be deducted, so you are not taxed on money you never got. If you account on a cash basis, you were never taxed on it, so there is nothing to deduct. In the US, for example, the IRS allows a business bad debt deduction only for amounts you had already included in income.
- UK VAT. If you paid the VAT over to HMRC at least six months have passed since the later of the due date and the date of supply, and the debt is written off in your VAT records, VAT bad debt relief may let you claim it back. Under cash accounting you only pay VAT when paid, so the question does not arise.
- Australian GST. Businesses that account on an accruals basis can generally make an adjustment for GST on a debt written off, or overdue for 12 months or more.
- EU VAT. EU law lets member states reduce the VAT for non-payment, but each sets its own conditions.
- India. GST has no general relief for bad debts at the time of writing, so the GST paid on an unpaid invoice is not reclaimed. Income tax generally allows a deduction for a bad debt written off in your accounts.
Most schemes ask for evidence: the invoice, proof of the tax paid, your chasing, and the date and reason of the write-off. If the customer pays later, you usually record it as income again and repay any tax relief you claimed.
Make the next one less likely
- Take a deposit on large jobs and first orders from new customers.
- Invoice in stages on long work, so the most you can lose is one stage.
- Stop work when an invoice is well overdue, before the next one builds up.
- Look at what is overdue every week, so a problem is found at 30 days, not at 300.
The short version
- A bad debt is one you have good reason to think will never be paid. A slow payer is not one yet.
- Chase, offer a plan, settle, or claim in an insolvency first, and keep a record of each step.
- Writing off is a bookkeeping entry. The invoice stays as issued.
- A credit note is for an agreed reduction, not for a customer who simply does not pay.
- Profit tax and VAT or GST relief may be available. The rules differ by country, so ask your accountant.