Can You Write Off Unpaid Invoices?
The answer is yes — in most countries, you can deduct unpaid invoices as a bad debt expense, but the rules are strict, the timing matters, and doing it incorrectly can lead to disallowed deductions, audits, or penalties.
This article explains:
When unpaid invoices qualify as tax-deductible bad debts
The difference between specific and general write-offs
Step-by-step how to legally claim them
Common mistakes that cause the deduction to be denied
What records must you keep
How tools like GenerateInvoice.net help prove and track bad debts
What Is a Bad Debt Write-Off?
A bad debt is money owed to your business that you have reasonable grounds to believe will never be paid. When you write it off, you record it as a business expense, which reduces your taxable income in the year you make the claim.
There are two main methods:
Specific (Direct) Write-Off
You identify one particular invoice or client as uncollectable.
This is the method almost all small businesses, freelancers, and sole proprietors use.
General (Reserve/Allowance) Method
You estimate a percentage of all your receivables that will go bad (e.g., 2–5%).
Mostly used by large companies with accrual accounting, small businesses are usually not allowed to use this method.
When Can You Write Off an Unpaid Invoice?
United States (IRS Rules – 2025/2026)
You must use the accrual method of accounting (cash-basis taxpayers generally cannot deduct bad debts until the year they actually receive the money).
The debt must be bona fide — from a legitimate sale of goods or services.
You must have made reasonable collection efforts (multiple invoices, emails, calls, demand letters, possibly small-claims court).
The debt must be wholly or partially worthless in the tax year you claim it (you have no realistic expectation of payment).
You must have previously included the amount in your taxable income (accrual-basis requirement).
Nigeria (FIRS Rules)
Bad debts are deductible if they are irrecoverable and written off in your books during the year.
You must show reasonable steps to recover the debt (demand letters, follow-ups).
For VAT-registered businesses: You can claim VAT bad debt relief if the invoice is more than 6 months old and remains unpaid.
Other Countries (Quick Overview)
United Kingdom (HMRC): Must be specifically identified as bad, with reasonable recovery attempts made.
Canada (CRA): Debt must be uncollectable in the year claimed; proof of collection efforts is required.
Australia (ATO): Similar — debt must be genuinely bad and written off in accounts.
Always verify the current rules with your local tax authority (IRS Publication 535 for the US, FIRS guidelines for Nigeria, etc.)—tax laws change annually.
Step-by-Step: How to Write Off an Unpaid Invoice
Document Every Collection Attempt
Keep copies of the original invoice, all reminders (email, WhatsApp, text), call logs, and partial payments received.
Record dates, methods, and responses (or lack thereof).
Make Reasonable Efforts to Collect
Send multiple polite reminders (3–5 over 60–90 days).
Escalate to formal demand letters.
For larger amounts: Consider small claims court, a collection agency, or a lawyer's letter (even if you ultimately decide not to proceed).
Determine if the Debt Is Worthless
The client is unresponsive, bankrupt, has disappeared, or has explicitly refused to pay.
You conclude that further efforts are unlikely to succeed.
Write It Off in Your Books
Journal entry: Debit “Bad Debt Expense” → Credit “Accounts Receivable".
Remove the invoice from your active receivables list.
Claim the Deduction on Your Tax Return
US: Report on Schedule C (sole proprietors), Form 1065 (partnerships), or Form 1120 (corporations) under “Bad debts".
Nigeria: Include as an allowable business expense on your annual tax return.
Attach supporting documents only if audited (keep them ready).
Keep Proof for at Least 7 Years
Most tax authorities have a 6–7 year statute of limitations for audits.
Strong documentation = protection.
Common Mistakes That Get Bad Debt Deductions Denied
Claiming the deduction too early (before exhausting reasonable collection efforts)
Using cash-basis accounting and still trying to deduct (cash-basis only deducts when paid)
No proof of collection attempts
Writing off partial amounts without proving partial worthlessness
Failing to remove the debt from accounts receivable
Using the general reserve method when not allowed
How GenerateInvoice.net Helps Prove Bad Debts
Auto-saves invoice history (last 10 free, unlimited with free account) → shows the invoice was real and sent.
Tracks status (sent, viewed, overdue) → proves the client received it and ignored it.
Shareable links → timestamped proof the client opened/viewed the invoice.
Itemised records → demonstrate the amount was legitimate business income.
Quick Summary: Can You Write Off Unpaid Invoices?
Yes — if the debt is genuinely uncollectable, you’ve made reasonable collection efforts, and you follow your country’s tax rules.
No — if you haven’t tried to collect, use cash-basis accounting (in most cases), or lack documentation.
Smart approach: Document everything, try to collect, write off only when hopeless, and keep strong records.
Have questions about your country’s specific rules, how much collection effort counts as "reasonable", or how to document attempts? Leave a comment — we help small business owners and freelancers navigate tax issues.