A write-off is an accounting entry that removes an asset you no longer expect to recover, most often an unpaid invoice, and records the amount as a loss. The word has three everyday meanings.
In accountingRemoving an uncollectible invoice or a worthless asset from the books and recording the loss.
In taxAn expense you deduct from taxable income, which lowers the tax you owe.
In everyday speechGiving up on something or someone as a lost cause, or a car too damaged to repair.
The sections below cover the accounting and tax meanings, starting with the write-off a business makes when a customer never pays.
What does a write-off mean?
To write something off means to reduce its value on the books to zero, or to the amount you still expect to recover, and to record the difference as an expense. The item stays in your history. It stops counting as something the business owns.
In accounts receivable, the item is an unpaid invoice. Until you write it off, the invoice sits in your balance sheet as money you expect to receive. Once collection has failed, carrying it there overstates both your assets and your profit. The write-off corrects both.
"Written off" is the past tense of the same action: a written-off debt is one that has already been removed from receivables and recorded as a loss. The write-off changes your books. The customer still legally owes the money.
Write-off vs tax write-off
An accounting write-off records a loss on your books; a tax write-off is any expense you can deduct from taxable income. A bad debt can be both: you write it off in your accounts, and if the tax rules are met, you also deduct it.
A tax write-off does not refund the full amount. It lowers taxable income, so the saving is the deduction multiplied by your tax rate. A $1,000 deduction at a 21% rate saves $210 in tax. The same arithmetic applies to a written-off invoice you are allowed to deduct.
Whether a written-off invoice is deductible depends on how you keep your books. Tax authorities only let you deduct a bad debt that was counted as income in the first place, which in practice means businesses on accrual accounting. The rules by country are in the tax section below.
How a bad debt write-off works
A business writes off a receivable once it judges the invoice uncollectible, by recording bad debt expense and reducing accounts receivable by the same amount. You never delete the invoice. You post an entry against it, so the history and the audit trail survive.
Reminders, calls and a final demand have failed, or the customer is insolvent or cannot be found.
Note the date, the amount and why. Some tax authorities require a written record made before year end.
Debit bad debt expense (or the allowance) and credit accounts receivable for the unpaid amount.
An income tax deduction, and in the UK, Australia and New Zealand, a VAT or GST adjustment.
The write-off journal entry
Under the direct method, a write-off debits bad debt expense and credits accounts receivable; under the allowance method, it debits the allowance for doubtful accounts instead. Take a $2,400 invoice a customer will never pay.
Direct write-off method
| Account | Debit | Credit |
|---|---|---|
| Bad debt expense | $2,400 | |
| Accounts receivable | $2,400 |
Allowance method, at the moment of write-off
| Account | Debit | Credit |
|---|---|---|
| Allowance for doubtful accounts | $2,400 | |
| Accounts receivable | $2,400 |
Under the allowance method, the expense was booked earlier, when you estimated likely losses and credited the allowance for doubtful accounts. The write-off itself then has no effect on profit. It only clears the specific invoice against the reserve you already set aside.
Direct write-off method vs allowance method
The direct method books the loss when a specific invoice goes bad; the allowance method estimates losses in advance and writes invoices off against that estimate. Both remove the same invoice. They differ on timing.
| Aspect | Direct write-off | Allowance method |
|---|---|---|
| When the expense is booked | When a specific invoice is confirmed bad. | At period end, as an estimate of future losses. |
| Entry at write-off | Debit bad debt expense, credit receivables. | Debit the allowance, credit receivables. |
| Matches loss to the sale period | No. The loss can land a year after the sale. | Yes. |
| Who uses it | Small businesses and cash-basis or tax-basis books. | Accrual-basis businesses reporting under accounting standards. |
| Tax treatment (US) | The IRS specific charge-off method works the same way. | The estimate is not deductible. Only the specific write-off is. |
In the US, trade receivables fall within ASC 326, the accounting standard on expected credit losses, according to Deloitte's guide to the codification. That is why businesses reporting under US GAAP estimate an allowance rather than waiting for invoices to go bad.
When to write off an invoice
Write off an invoice once collection has realistically failed, which is usually long after it first becomes overdue. Four situations usually justify it: the customer is insolvent, cannot be traced, has ignored a final demand, or the balance is smaller than the cost of recovering it.
Two deadlines also affect timing. The first is tax. In the UK, VAT relief opens once a debt is six months overdue. In Australia, a GST adjustment opens at 12 months overdue. The second is the statute of limitations on the debt, after which legal recovery becomes harder or impossible.
Weigh the cost of the next step against the balance. A $400 invoice does not justify a $500 legal claim. A $40,000 invoice probably justifies a letter of demand and legal advice before anyone writes it off. Check the aging schedule monthly so these decisions happen on purpose.
How to write off an invoice in Xero
In Xero, you write off a bad debt by applying a credit note to the unpaid invoice, coded to a bad debts account. The steps below are for businesses on the accrual basis for sales tax, as described in Xero Central's bad debt article.
- Find the unpaid invoice.
- Click the menu icon and select Create and apply credit.
- In the Account field, select your bad debts account, or the same account code as the original invoice. Check the date, tax rate and amount are correct.
- If the invoice uses tracked inventory, remove the item code, so the credit note does not add stock back.
- Click Approve.
On the cash basis, Xero's method is different: the credit note uses the same account and tax rate as the original invoice, and a separate manual journal at No Tax records the bad debt expense. Xero notes that both methods have a net zero effect on the sales tax report, and says to consider the tax implications when you choose an account.
How to write off bad debt in QuickBooks Online
In QuickBooks Online, you write off bad debt with a credit memo that uses a Bad debts item, then apply that credit to the invoice. Intuit's QuickBooks help article sets it up in four steps.
- Create an expense account named Bad debts, with the detail type Bad debts.
- Create a non-inventory product or service named Bad debts, linked to that account.
- Select + Create, then Credit memo. Choose the customer and add the Bad debts item for the unpaid amount.
- Open Receive payment for the customer, select the invoice, and apply the credit memo from the Credits section.
The invoice then shows as paid by credit, and the loss sits in the Bad debts expense account for your profit and loss report.
Is a bad debt write-off tax deductible?
A business bad debt is usually deductible, but only if the invoice was counted as income first and the debt has actually been written off. That rules out cash-basis businesses, which never recorded the unpaid invoice as income. The detail, and any VAT or GST relief, differs by country.
| Country | Income tax deduction | VAT or GST relief | If the customer pays later |
|---|---|---|---|
| United States | Deductible if the amount was included in gross income. Most businesses must use the specific charge-off method, reported on Schedule C for sole proprietors. IRS Topic 453 | No federal VAT. State sales tax rules vary. | The recovered amount is income in the year you recover it. 26 CFR 1.166-1 |
| United Kingdom | A specific bad debt is deductible; a general reserve is not. Does not apply to the cash basis. HMRC BIM42701 | VAT bad debt relief once the debt is 6 months overdue, written off in your VAT accounts, VAT already paid, claimed within 4 years and 6 months. VAT Notice 700/18 | Brought back into tax in the year of recovery. BIM42730 |
| Australia | Deductible if previously included in assessable income and the write-off decision is recorded in writing before the end of the income year. ATO | GST decreasing adjustment when the debt is written off as bad, or is 12 months or more overdue. Accrual GST basis only. | Assessable income when received, plus a GST increasing adjustment. |
| New Zealand | Check with your adviser. | GST credit adjustment in the period you write the debt off as bad. IRD | Check with your adviser. |
General information, not tax advice.
The practical point for UK and Australian businesses: the VAT or GST you paid on an invoice that never got paid can come back, but only once the time test is met and the write-off is in your records. Check the tax claim when you post the write-off, so it is not missed.
Can you recover a debt after writing it off?
Yes. A write-off does not cancel what the customer owes, so you can keep pursuing the debt and record the money if it arrives. The entry reverses the loss rather than editing the original invoice.
In Xero, record the payment as a receive money transaction using the same account you chose on the credit note. If you used a manual journal, reverse it for the amount recovered, as Xero Central describes in the same bad debt article. For tax, the recovered amount comes back into income in the year you receive it in the US, UK and Australia.
A recovered debt is sometimes called a debt recovery or a bad debt recovery. Keep the original write-off record with it, so your accountant can see both entries.
Write-off vs charge-off vs write-down
A write-off removes an asset's value entirely, a write-down reduces it partly, and a charge-off is the term lenders use when they write off a loan or credit card balance. All three record a loss.
- Write-off: the asset goes to zero, or to the amount you still expect to recover. Used for bad debts and worthless assets.
- Write-down: the asset loses part of its value, such as inventory that is still sellable at a lower price.
- Charge-off: a lender's write-off of consumer or business credit. The charge-off entry covers how it affects a borrower's credit file.
How Paidnice keeps invoices out of the write-off pile
Consistent chasing while an invoice is still young is the cheapest way to avoid writing it off later. Paidnice runs the chasing from Xero or QuickBooks Online, so every invoice gets the same reminders, statements and late fees on schedule, whoever is busy that week.
- Escalations at set ages: a phone call task, a stop-credit instruction or a template legal letter fires when an invoice reaches the days overdue you choose.
- Aged receivables by contact: the 1 to 30, 31 to 60, 61 to 90 and 90+ day buckets show which balances are heading toward a write-off decision.
- A payment-history score: every customer carries a score from 1 to 100 built from how they pay, shown against the contact.
Paidnice does not write off debts. That decision stays with you and your accountant. The Emails report lists every message sent to the customer with its delivery history, which gives you a dated chasing record to keep with the write-off.
