Carrie C. Susz, EA

This is the one question that I hate to answer. I’ll admit it: the first time I heard the answer to this, I hated it. To this day, I hate replying to the inevitable “deadbeat client” question. So here we go…the dreaded answer, but first, the question that gets you there:

“My client didn’t pay me, can I claim a loss?”The short answer is sort of.  You can claim the expenses that you incurred while working on the client’s project or producing the product order.  Likewise, if you have a rental, the months that the rental is empty is not a loss.  Your “loss” in both of these is simply that you did not receive the income.  You get to claim the expenses of supplies, equipment, cleaning, or whatever you’ve incurred in the course of business or renting.

So what about your time?  Do you get anything for that?  Sadly, the answer is no,the IRS doesn’t care what you bill your time at.  The fact of the matter is, it’s extremely easy to overinflate your time or rate and take a loss.  So easy, in fact, that it’s just not allowed.  The only way to claim your own time and hourly rate is if you pay yourself wages, even then, it’s the business claiming the loss and can’t be used for a business that does not pay wages or subcontractor costs.

So can we claim any bad debt from deadbeat clients?  No, UNLESS, you use accrual accounting and the loss spans from one tax year to the next.  Even then, the only reason is because you already claimed the income.  Here’s how accrual (as opposed to cash or a hybrid method) method works: you recognize any income or expenses at the time that they are billed as opposed to when you receive or send out money.  This is based on an accounts payable or accounts receivable.  The exception is that you claimed the income in the prior year (let’s say 2007) because you use accrual accounting and recognized the income at the time that you billed the client.  The money, let’s say $500, was claimed as income in 2007 when it was billed.  When you get to the end of 2008, you realize that the client didn’t pay the bill.  So, you’ve claimed the income and you never received it.  To make matters worse, let’s say the client skipped town and just can’t be found anymore.  You know you’re not going to see the $500.  This is where ” bad debt” comes in.  You have a bad debt.  In good faith, you claimed the income and it never materialized.  Now it’s a “bad debt.”  In 2007, you said you had $500, and in 2008 you recoup the taxes you paid on the $500 in the prior year.

All in all, it sucks that there’s nothing else to do.