It's important to know how to write off debts if you own a small business and you have debts you can't collect. There are two types of debts associated with a home business: debts that are owed by your company to your suppliers and creditors and those debts that customers owe you. You can claim write offs on debts that are owed to you by customers.
Criteria for Writing off Debts
In order to write off debts for your home business, you should be able to prove legally that you have a relationship with the debtor. You should also be able to prove that the amounts that are due are negligible in value to your company. Lastly, it's essential that you prove that your company has a good credit history and is diligent in collecting payments from all customers. Records of other customers need to be provided to the IRS in order to prove the last. If all these three criteria are met, the IRS will not question your need to write off a bad debt.
How to Write off Debts
In order to write off debts, it's essential to set up an allowance for bad debts. The amount that is to be written off should be in proportion to the overall income of your business. The amount should be entered into the allowance for bad debts account as a debit. A corresponding credit should be posted on the accounts receivable page for that customer and in this manner, the two amounts are balanced and the debt written off.
In general, to be able to write off a debt, it's essential for you to be able to prove that you have made all due efforts to collect the debt and have been unsuccessful in your attempts to do so.