I get this scenario/question all the time: You finish an $18,000 job. The client went out of business. You never got paid.

Can you deduct that loss?

The answer: It depends on your accounting method.

**If you use the accrual method** (you report income when invoiced, not when paid):
✓ YES, you can deduct the bad debt under IRC §166
✓ You already paid tax on that $18,000 when you invoiced it
✓ Once it’s uncollectible, you get the deduction

**If you use the cash method** (you report income only when you receive payment):
✗ NO deduction
✗ You never reported the income, so there’s nothing to write off
✗ Note: Most small construction businesses use cash method

**Tip:** Under the accrual method, you don’t have to wait until the debt is 100% worthless. Partial bad debts are deductible. Document what you believe is uncollectible and your basis for that conclusion.




Disclaimer: This content is provided for educational purposes only and is not legal, tax, accounting, or financial advice. Every situation is unique, so consult your own attorney, CPA, or financial advisor before making decisions based on this information.