No Bad Debt Deduction for Cash Method Taxpayers

It's a well-settled issue, but some business taxpayers still think you can take a deduction for an unpaid invoice if you're on the cash method of accounting. You can't. And the reason is simple when you think about it. Under the cash system you only pay tax on money you receive. Since you never paid tax on the money, you can't take a deduction. (You're still getting a deduction for your cost of goods sold, labor, etc. on the return.) Under the accrual system you're reporting income even if you don't receive the cash or check, so if you can't collect, you've got a bad debt deduction.

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