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I have a small business and I'm trying to understand how bad debts affect taxable income. I am using accrual method of accounting.

Let's say in the year 2008, I sent an invoice 101 to a client for $50k CAD. My revenue for the year of 2008 is $50k because I only had that one client and that one project. My guess is that my taxable revenue for the year 2008 is $50k. Is this correct?

Let's say in the year 2018 (ten years later), I realize my client still hasn't paid my invoice 101. I receive a letter in the mail from an insolvency agency that my client has declared bankruptcy, with only $100k worth of assets and over $50M worth of debt to creditors ($100k out of the $50M debt is to the government and banks). I doubt I will get even a penny for my invoice 101. So I go into QuickBooks and create a credit memo to my invoice 101 and assign it as bad debt. I made no sales in 2018 because I decided not to do any work.

Is my taxable revenue for the year 2018 -$50k because I discovered the bad debt in 2018? Or is my taxable revenue for the year of 2018 only $0? If it is the latter question, do I have to pay my accountant to adjust my tax filing in 2008? So that my taxable income in 2008 is $0, and my taxable income in 2018 is also $0?

Does the outcome/impact change if invoice 101 was sent in 2017 instead of 2008?

  • maybe this article explains a bit of what I'm thinking northernontariobusiness.com/columns/bissonette/… . It talks about the concepts of Carry Back Losses and Carry Forward Losses – John Jul 12 '18 at 2:53
  • Are you doing Cash or Accrual Accounting? Under the former, you wouldn't have recognised invoice 101 until it had been paid, therefore there would be no revenue to reverse. Under the latter, you would have recorded it as income when generated. My impression from this site is cash accounting tends to be the default for smaller businesses. (Separately, I'd question the chances of survival of a company that didn't notice an invoice hadn't been paid for ten years...) – TripeHound Jul 12 '18 at 8:11
  • I am using accrual method, I updated my question at this comment. – John Jul 12 '18 at 11:39

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