I have several invoices I've billed clients, and they have never paid. How would I label or categorize the invoice, so that it shows as a business "bad debt", and thus go as an expense on my P&L if I change my company as "accrual" instead of "cash"?
I think the tail might be wagging the dog here. If I understand correctly you want to switch from cash basis to accrual so that you can expense unpaid invoices as bad debt. This is not a good reason to switch to accrual, because there is no financial benefit to this change. Note you can't expense those invoices after you switch because they occurred before the change. In cash basis you can simply void the invoice and categorize it as "Bad Debt" (or whatever you want to call it), but it is not a deductible expense for tax purposes. In accrual method, as soon as you invoice, whether you get paid or not, that invoice amount is taxable income for the year. In other words, you still pay tax on the invoice even if the client does not pay you (so you need to have enough cash to cover the tax bill.) Once you are sure the client won't pay you can write it off as an expense because you included it in your income, and you never actually received that income.
The most important thing to realize is that using the accrual basis does not net you any additional expenses for tax purposes compared to cash basis. It's just a different method of accounting for the same set of events. The two main reasons to consider accrual method are:
- If you know you're going to have some unpaid invoices, your revenue will appear slightly higher as you will include those invoices in total revenue. Higher revenue on paper makes your company appear bigger, and could potentially increase the amount a bank is willing to loan you.
- With unpaid invoices, you have a little more control over when you choose to "undo" the income. For example, you could choose to pay tax on the unpaid invoice one year, and write it off the next year. Maybe you would do that if you thought you would be in a higher tax bracket next year compared to this year.