Debbie, a small business owner, faces a dilemma. Although her daycare business is steady, she recently faced a revenue loss. In the midst of moving, one of her clients neglected to pay her for one month of service totaling $1,200. “I’m devastated. Yes, business is good, but every nickel from my income is accounted for. How can I make up this loss?” Debbie wonders what tax-deductible recourse small business owners have when facing an unpaid bill? From a tax accountant perspective, there is really only one option.
Most small businesses employ the cash-basis accounting method when reporting income and expenses. If a business receives cash, they are said to have a basis, money. Meaning taxes are only paid on income received. If potential income is missing, no taxes need to be paid on it. However, and unfortunately for Debbie, no deduction may be taken on loss.
Debbie may file a deduction only if expenses were incurred while the child was in her care, but not from loss of wages after the child’s parents neglected to pay. Tax forms have no place to claim loss of wages because they only consider income collected. If lunch or a field trip were expenses Debbie paid out, then she may claim them as deductions.