By Paras Saini & Shubham Sharma ·
When to Write Off an Invoice as Bad Debt — And What to Do First
The invoice is 95 days overdue. You have sent 5 emails, made 2 calls, and received one vague reply six weeks ago. The amount is $3,200 — significant, but small enough that a solicitor's fees could eat half of it. At what point do you stop chasing and accept the loss? And when you do, what are the actual steps — accounting entry, tax implications, legal rights? This guide gives you the exact decision framework, with numbers.
Key takeaways
- Invoices at 90+ days overdue have a collection rate below 40% without professional escalation — at that point, write-off is often the rational decision
- Write-off probability by age: 2–8% at 31–60 days, 15–35% at 61–90 days, 40–60% at 91–120 days, 60–80% at 120+ days
- Writing off is an accounting decision only — you keep the legal right to collect even after the write-off
- Collections agencies charge 20–40% of recovered amounts, making them cost-effective only for invoices over $1,000–$1,500
- Cash-basis freelancers (most sole traders) generally cannot deduct bad debt from taxes; accrual-basis businesses can
- Before writing off: demand letter + 7-day deadline. That step alone resolves roughly 30% of cases that reach 90+ days
Bad Debt vs. Slow Payer: The Distinction That Changes Everything
Bad debt is a receivable — money owed to you — that you have determined is unlikely to be collected. Not a slow payer. Not a difficult client. Genuinely uncollectable. The distinction matters because the actions you take for each are completely different.
A slow payer needs reminders, a firmer tone, and eventually a formal demand letter. Bad debt needs an accounting entry. When you write off an invoice, you are recording a loss equal to the unpaid amount. This matters for two reasons: it gives you an accurate picture of your actual financial position (an AR balance padded with uncollectable invoices overstates your assets), and depending on your tax basis, it may create a deductible business expense.
What actually happens if you never write it off: the invoice sits in your AR forever, distorting your numbers, occupying your attention with follow-ups that go nowhere, and potentially overstating your income to HMRC or the IRS. Leaving uncollectable invoices open is not neutral — it costs you clarity and sometimes taxes on money you never received.
When Should You Write Off an Invoice?
There is no universal rule, but these situations justify writing off an invoice:
1. Invoice is 90+ days overdue with no response
After multiple follow-up emails, a phone call, and a formal demand letter — all unanswered — the probability of collection drops significantly. Invoices over 90 days overdue have a collection rate below 50% without escalation.
2. Client has declared insolvency or bankruptcy
File a creditor claim in the relevant insolvency proceeding (you may recover a small fraction), then write off the remaining balance. Continuing to chase is futile once insolvency proceedings begin.
3. Recovery cost exceeds expected recovery
A $300 invoice going through small claims court may cost you $200 in filing fees and 4 hours of time. The breakeven calculation matters: if collection costs more than the invoice, the write-off is the better financial decision. Collections agencies typically charge 20–40% of recovered amounts, making them worthwhile mainly for invoices over $1,000–$2,000.
4. Debtor is unreachable or dissolved
If the client business has dissolved, the contact has disappeared, or all contact channels have failed across 60+ days — write it off. Document your attempts.
Use the bad debt calculator to see the expected write-off risk for your current AR by age bucket.
How to Calculate a Bad Debt Reserve
A bad debt reserve (allowance for doubtful accounts) is a proactive estimate of how much of your current AR is unlikely to be paid. Rather than waiting for individual write-offs, you set aside a provision that reflects your historical collection experience.
The Percentage of AR Method
The simplest approach: if historically 3% of your invoiced revenue goes uncollected, reserve 3% of your current AR balance.
Example: Current AR: $80,000 | Historical write-off rate: 4%
Reserve = $80,000 × 0.04 = $3,200
The Aging Schedule Method (More Accurate)
Apply different write-off probabilities to each AR age bucket — newer invoices have a lower write-off risk than older ones. This gives a more accurate reserve. See the rates in the section below.
Example:
Current (0–30 days): $50,000 × 1% = $500
31–60 days: $20,000 × 5% = $1,000
61–90 days: $8,000 × 25% = $2,000
90+ days: $2,000 × 60% = $1,200
Total reserve: $4,700
The aging schedule method is standard for accrual-basis accounting. Use the AR aging report generator to bucket your invoices, then apply the rates from the section below.
Write-Off Risk Rates by Invoice Age
Industry data on collection rates by invoice age gives you the basis for your reserve calculation. These rates reflect typical outcomes across service businesses — your actual rates may be higher or lower depending on your client base.
| Invoice Age | Typical Write-Off Risk | Collection Probability | Recommended Action |
|---|---|---|---|
| 0–30 days (current or just overdue) | 0.5–2% | 98–99% | Send friendly reminder; no concern |
| 31–60 days overdue | 2–8% | 92–98% | Follow up with firm tone; check for dispute |
| 61–90 days overdue | 15–35% | 65–85% | Send formal demand letter; consider small claims |
| 91–120 days overdue | 40–60% | 40–60% | Final notice + collections agency referral |
| 120+ days overdue | 60–80% | 20–40% | Evaluate write-off; escalate aggressively if amount justifies it |
These rates are general benchmarks. Enter your own AR figures into the bad debt calculator to get a calculated reserve estimate based on these industry rates.
What to Do Before Writing Off
Exhaust these steps before writing off. Even a partial recovery is better than a full write-off, and documenting your attempts is essential for tax purposes.
Step 1: Send a Formal Demand Letter
A formal written demand — sent by email and registered post — sets a final deadline and states the specific legal action you will take if unpaid. See demand letter templates for unpaid invoices. This step is often enough to prompt payment from clients who have been avoiding you.
Step 2: Evaluate Small Claims Court
For invoices over $500–$1,000, small claims is often worthwhile. Filing fees are low ($30–$100 in most US states, £35 online in England and Wales), you represent yourself, and a judgment creates a legal debt that can be collected via wage garnishment or asset seizure. See how to file for unpaid invoices in small claims court.
Step 3: Consider a Debt Collections Agency
Collections agencies work on a contingency basis (typically 20–40% of recovered amounts). For invoices over $1,500 where you have solid documentation, this can be worth it. The agency does the collection work; you receive the net amount. You can still write off the uncollected portion on your books.
Step 4: Document Everything Before You Write Off
Before writing off, export your full chase history: dates of all emails, calls, letters, responses (or lack thereof), and any payments made. If you are an accrual-basis taxpayer, this documentation supports your bad debt deduction. Use InvoiceGrid's Evidence Pack to generate this automatically from your chase log.
Tax Implications of Bad Debt Write-Off
Whether you can deduct a bad debt depends on your accounting method and jurisdiction. Here is the general picture — always confirm with your accountant.
Cash-Basis Taxpayers (Most Freelancers)
If you report income only when you receive payment (cash basis), you never recognized the unpaid invoice as income — so there is no bad debt deduction. The invoice simply goes unrecorded. This is standard for most freelancers and sole traders in the US, UK, and Australia who have not elected accrual accounting.
Accrual-Basis Taxpayers (Most Businesses)
If you record income when you invoice (accrual basis), you can deduct a bad debt in the year it becomes uncollectable. The debt must be a genuine business debt (not a personal loan), and you must have made reasonable efforts to collect it (documented). In the US, you can use the specific charge-off method (deduct when a specific invoice is worthless) or the allowance method (for larger businesses).
UK-Specific: VAT Bad Debt Relief
If you are VAT-registered in the UK and have paid VAT to HMRC on an invoice that subsequently becomes uncollectable, you can claim Bad Debt Relief to recover the VAT amount. The invoice must be at least 6 months overdue from the due date, written off in your accounts, and below £1,000 per claim (or above that with additional documentation). Claim on your VAT return.
The write-off amount reduces your taxable profit in the year of write-off (for accrual-basis businesses). For a business in the 20% tax bracket writing off a $5,000 invoice, the net cash impact is $5,000 lost revenue minus $1,000 in tax savings = $4,000 real loss. The tax benefit does not make writing off a good outcome — it just reduces the damage.
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Frequently Asked Questions
My invoice is 100 days overdue and the client has gone quiet — do I write it off now or keep chasing?+
Send one final demand letter first with a 7-day deadline and state explicitly that you will write off the debt and cease contact if unpaid. That step alone resolves roughly 30% of cases at this stage — the formal letter signals you are serious in a way another email does not. If that deadline passes with no response, write it off, document the decision, and engage a collections agency if the amount justifies it (generally $1,500+).
When should I write off an invoice as bad debt?+
Four clear triggers: (1) invoice is 90+ days overdue with no payment or response despite multiple attempts; (2) client has declared insolvency or bankruptcy; (3) cost of further collection exceeds expected recovery — a $400 invoice that would cost $200 in filing fees and 3 hours of time to pursue is a write-off decision, not a legal one; (4) debtor is unreachable across all channels for 60+ days. Always send a formal demand letter before writing off — it is a legal requirement for tax deductions in many jurisdictions and often prompts payment.
If I write off an invoice, can I still collect later?+
Yes. A write-off is an accounting entry, not a legal waiver. You still have the right to pursue the debt through collections or court after writing it off. If the client pays after you have written it off, record the recovery as income. Many freelancers write off an invoice and simultaneously hand it to a collections agency — the accounting entry and the collection attempt happen in parallel.
Can I deduct a bad debt from my taxes?+
It depends on your accounting method. Cash-basis taxpayers (most sole traders and freelancers) cannot deduct bad debts — the income was never recorded, so there is nothing to deduct against. Accrual-basis businesses can deduct a bad debt in the year it becomes uncollectable, provided you made documented collection attempts. In the UK, VAT-registered businesses can also claim Bad Debt Relief to recover VAT paid on invoices more than 6 months overdue. Always confirm with your accountant — rules vary by jurisdiction and entity type.
What is a bad debt reserve and should I have one?+
A bad debt reserve (allowance for doubtful accounts) is a proactive provision — an estimated amount set aside to account for invoices likely not to be paid, calculated before specific invoices go bad. If you have $80,000 in AR and historically 4% goes uncollected, you hold a $3,200 reserve. For freelancers, a formal reserve is optional; for agencies and small businesses with consistent volume, it gives a more accurate picture of actual cash position. Use the aging schedule method for more precision: apply 1% to current AR, 5% to 31–60 day AR, 25% to 61–90 day AR, and 60% to 90+ day AR.
A collections agency wants 35% of whatever they recover — is that worth it?+
The break-even is roughly $1,000–$1,500 for most agencies. For a $500 invoice, 35% commission means you net $325 — barely worth the administrative effort. For a $5,000 invoice, you net $3,250 — meaningful money you would otherwise lose entirely. Only engage agencies on invoices over $1,500 where small claims is not practical (international clients, amount too high for local limits). Require contingency-only terms — never pay upfront fees.