united-states, taxes, accountingMy startup (single member LLC) is part software and part consultancy. The software side is not making any money yet, but I had a client where all the revenue was from. However, this client and I have parted ways over an unpaid invoice. The amount is rather large (for me), and I am currently considering collections.
My question is, if I cannot collect, can I write this off as a loss? I’ve read that if I use the accrual method of accounting I can, but not if I use the cash method. For 2015, I did not use an accounting method (just paid regular income taxes via 1040 since my LLC is disregarded). I am not sure how to go about this. Any advice appreciated.
Simplified, accrual-based accounting means that you would have recognized and booked the revenue at the time you invoice the client. Cash-based accounting means you don’t recognize the revenue until you have received payment.
We can safely assume you are using cash-based accounting (even if you weren’t aware that’s how you’re doing it) because that’s how individual tax returns are based and I’m sure you didn’t pay income taxes on the unpaid invoice.
So to answer your question, no, you cannot deduct the unpaid invoice or receive some sort of tax deduction because you never recognized the income in the first place. You can, however, deduct your allowed business expenses (but not your time or other intangibles), make sure you keep your receipts!
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