How to write off a bad debt
When and how to write off an unpaid invoice: direct write-off vs allowance, getting back sales tax or GST/HST, what the IRS and CRA let you deduct, and later recoveries.
8 min read · October 18, 2026
When a debt is bad
A bad debt is an invoice you have given up expecting to collect. The customer has closed, gone bankrupt, disappeared, or stopped answering after months of reminders. Writing it off removes it from accounts receivable and records the loss, so your balance sheet shows only money you can actually expect.
Write off when you have real evidence the money is gone. That means returned mail, a bankruptcy notice, a collection agency giving up, or a long record of chasing with no response. Keep that evidence with the write-off. It is what supports the deduction.
One point decides most of what follows: you can only write off income you have already recorded. On the accrual basis, the invoice was counted as income when you issued it, so the write-off reverses that. On the cash basis, an unpaid invoice was never income, so there is nothing to write off or deduct. You just never record the sale. See cash vs accrual.
Direct write-off or allowance
The direct write-off method records the loss when a specific invoice goes bad. A US customer owes $4,320: $4,000 of work plus $320 of sales tax (8% in this example). When it is clearly uncollectible:
| Account | Debit | Credit |
|---|---|---|
| Bad debt expense | $4,320.00 | |
| Accounts receivable | $4,320.00 |
The allowance method estimates bad debts in advance. At year-end you look at the receivables and estimate how much will not be collected. Say it is 2% of $80,000, or $1,600. You record that as an expense against a contra-asset account:
| Entry | Account | Debit | Credit |
|---|---|---|---|
| Year-end estimate | Bad debt expense | $1,600.00 | |
| Allowance for doubtful accounts | $1,600.00 | ||
| Later, a $900 invoice goes bad | Allowance for doubtful accounts | $900.00 | |
| Accounts receivable | $900.00 |
The allowance method matches the loss to the year of the sale, which is what accounting standards prefer. Lenders or investors who read your financial statements may expect it. Most small businesses use the direct write-off for day-to-day work, and the accountant adds an allowance at year-end if the statements need one.
AcboBooks uses the direct method. Write Off as Bad Debt posts all or part of an invoice's open balance to the Bad Debt expense account and closes the invoice. An allowance, if your accountant wants one, is an ordinary adjusting journal entry.
Getting the sales tax or GST/HST back
If you already paid the tax on the invoice to the government, writing the invoice off does not get it back by itself. You claim it on a later return.
US sales tax
Many states let you deduct or take a credit for sales tax you remitted on an account you later write off. The forms, the time limits, and whether partial payments count all vary by state. Check your state's rules before you file. Once you have claimed the $320, move it out of bad debt expense:
| Account | Debit | Credit |
|---|---|---|
| Sales tax payable | $320.00 | |
| Bad debt expense | $320.00 |
Canadian GST/HST
The CRA lets you recover GST/HST you reported on a credit sale to an arm's-length customer once you write the debt off in your records. The adjustment is A × B ÷ C, where:
- A is the GST/HST on the sale.
- B is the unpaid amount written off, including tax.
- C is the total sale, including tax.
You claim it on line 107 of a return filed within four years of the due date of the return for the period of the write-off.
An Ontario example: an invoice of $5,000 plus 13% HST ($650) is $5,650. The customer paid $2,000 and the remaining $3,650 is written off. The HST adjustment is $650 × $3,650 ÷ $5,650 = $419.91.
| Entry | Account | Debit | Credit |
|---|---|---|---|
| Write-off | Bad debt expense | $3,650.00 | |
| Accounts receivable | $3,650.00 | ||
| HST claimed on line 107 | GST/HST payable | $419.91 | |
| Bad debt expense | $419.91 |
The bad debt left on the books, $3,230.09, is the unpaid share of the $5,000 of income. Quick Method filers generally cannot make this adjustment. See the GST/HST filing guide for the return itself.
AcboBooks writes off the open balance, tax included, to Bad Debt. It does not change sales tax or GST/HST payable on its own. Record the tax recovery with the entry above in the period you claim it.
What you can deduct
United States
- Businesses generally must use the specific charge-off method. You deduct specific debts in the year they become wholly or partly worthless. An estimated allowance is not deductible. The nonaccrual-experience method is a narrow exception with its own requirements.
- For a partly worthless debt, the deduction is limited to the amount you charged off on your books that year. So the write-off in your books matters.
- On the cash method, you cannot deduct amounts you never included in income.
Canada
- You can deduct a bad debt if you determined in the year that the receivable is bad and you had already included it in income. It goes on line 8590 of the T2125, or the matching line of a corporation's return.
- Unlike the IRS, the CRA allows a reserve for doubtful debts: a deduction for receivables you reasonably doubt you will collect. The reserve is added back to income the next year and re-estimated each year.
If the customer pays later
Occasionally a written-off customer pays. Record the money as received, and code it back to Bad Debt or to a "Bad debt recovered" income account. Do not reopen the old invoice. In AcboBooks, a deposit with the customer as "Received from" and the account as "From account" does this in one step. If the customer pays $1,000 of the US example:
| Account | Debit | Credit |
|---|---|---|
| Bank | $1,000.00 | |
| Bad debt expense (or Bad debt recovered) | $1,000.00 |
- US income tax: a recovery is income up to the amount you deducted, apart from any part of the deduction that did not reduce your tax. It is reported as other income.
- Canadian income tax: a recovered bad debt you deducted is brought back into income.
- GST/HST: if you claimed the adjustment, report the tax share of what you recover on line 104 for the period you receive it. The amount is the recovery × the GST/HST on the sale ÷ the total sale including tax. Do not amend the earlier return.
- US sales tax: states that allow the deduction generally expect the tax on a recovery to be reported again. Check your state's rule.
Review the ageing report every month so write-offs are rare decisions, not year-end surprises. It is step five of the monthly closing checklist.
Write off an unpaid invoice
In AcboBooks you can write off all or part of an invoice from the A/R ageing report. The loss posts to Bad Debt, the invoice closes, and the customer's balance is right.
This article is general information, not tax, legal or accounting advice. Rules and dates change; check the official source or ask your accountant before acting.
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