How does the business bad debt deduction work for unpaid invoices?
The business bad debt deduction lets you deduct an unpaid invoice that is wholly or partly worthless, but only if the amount was already included in income. The IRS says a debt is worthless when there’s no reasonable expectation of repayment after reasonable collection steps, and you deduct it in the year it becomes worthless.
Who qualifies for the business bad debt deduction?
Generally accrual-method businesses that reported the invoice as income[source].
When is a debt worthless?
When there’s no reasonable expectation of repayment[source].
Can I deduct part of a debt?
Yes, if partly worthless and charged off on your books[source].
What if I recover money later?
Recoveries are income up to the amount deducted that reduced tax[source].
Where do I report it?
Sole proprietors generally use Schedule C[source].
General information, not tax advice. Tax rules depend on your accounting method and facts; confirm with a tax professional.
Related answers
Cash basis · Write off and collect
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Frequently asked questions
What if I missed the year?
Refund claims for totally worthless debts can be filed up to 7 years from the return due date[source].
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Sources: IRS Topic No. 453, Bad Debt Deduction; IRS Publication 334 (2025), Tax Guide for Small Business, ch. 8 “Bad Debts”; 26 U.S.C. § 166 (bad debts), via Cornell LII (accessed Oct 18, 2026).
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