When to Write Off an Unpaid Invoice (And How to Decide It's Truly Uncollectible)

Every business with receivables eventually ends up staring at an old invoice and wondering if they should keep chasing it or just accept the loss. Most owners wait too long. They let the invoice sit on the books for 18 months, occasionally follow up without urgency, and end up absorbing the loss anyway without any of the planning that a write-off allows.

Why this decision is harder than it looks

The obvious instinct is to keep trying to collect as long as there is any hope. But that instinct has a cost. Your accounts receivable balance shows as an asset on your books. If a material portion of that asset is genuinely uncollectible, your financial statements are overstated. That matters when you are showing statements to a lender, a buyer, or just trying to understand your actual financial position.

There is also a tax angle. In Canada, a bad debt expense is deductible when you can demonstrate the debt is genuinely uncollectible. If you run your business on the accrual method, you recognized the income when you invoiced. The write-off lets you offset that income. But CRA expects you to have actually tried to collect before claiming the deduction. Sitting on it indefinitely and then writing everything off in December is a pattern that can attract scrutiny.

The dollar cost of getting this wrong is real. An owner who keeps $40,000 in uncollectible receivables on the books for two years is carrying a false asset, paying tax on income they will never collect (on accrual), and making collection decisions based on an inflated idea of what they are owed.

The framework: five questions before you write it off

1. Is the debt disputed or just unpaid?

A disputed invoice has a different collection path than a client who simply has not paid. If the client has raised a legitimate complaint about the work or product, you may need to resolve the dispute first. If the client has gone silent and never disputed the amount, that is a different situation.

2. How old is the invoice relative to your payment terms?

An invoice that is 30 days past due is a collections problem. An invoice that is 180 days past due and where the client has stopped responding is approaching bad debt territory. There is no universal rule, but for most small businesses, anything over 120 days past due with no payment plan in place deserves a hard look.

3. What is the client's current situation?

If a client has closed their doors, declared bankruptcy, or is in obvious financial distress, the collectibility test is straightforward. If you have reason to believe the business is still operating and profitable, there is more to work with.

4. What have you actually done to collect?

CRA's standard for bad debt is that you have taken reasonable steps to collect. That means a documented series of follow-ups, not a single email. If you have sent reminders, made phone calls, offered a payment plan, and potentially sent a demand letter, you have a defensible record. If you sent one invoice and then did nothing for a year, you have not met the threshold.

5. Does the amount justify the cost of legal collection?

For smaller invoices, the cost of a collections agency (typically 25-40% of the recovered amount) or legal action often exceeds the recoverable value. A $3,000 invoice that costs $1,200 in legal fees to collect nets you $1,800 before your own time. At some amount, writing it off and moving on is the rational choice.

An illustrative example

Consider a small consulting firm carrying three invoices totaling roughly $28,000 from two former clients. One client had gone quiet for six months after a disputed delivery. One was a slow payer who had made partial payments before stopping. One was a startup that had folded.

Working through the framework, the startup receivable was clearly a write-off: documented closure, no assets, the debt was genuinely uncollectible. The disputed invoice warranted one more formal written demand with a 14-day response window before writing off. The slow payer had enough history of partial payment to justify a structured payment plan conversation before declaring it bad debt.

Three invoices, three different paths. The owner had been treating them all the same way: periodic check-ins with no documentation and no deadline. Separating them saved one invoice and created a clean record for the other two.

What to do about it

1. Pull an aged receivables report sorted by days outstanding. Flag everything over 90 days past due.
2. For each flagged invoice, document what collection steps have been taken and when. If there is no documentation, start now: send a formal written demand with a deadline.
3. Separate disputed invoices from unpaid ones. Disputed invoices need resolution, not just collection. Put them in a separate category and address the dispute directly.
4. For invoices over 120 days with no payment and no response, do the math: compare the net recovery through a collections agency against the write-off value. If writing it off makes more financial sense, make the call.
5. When you write off the debt, create a journal entry that documents the amount, the client, the invoice date, and the basis for the write-off. Keep the supporting correspondence. This is your CRA file if they ever ask.
6. Review your invoicing terms and follow-up process. Most bad debt is preventable with tighter payment terms, earlier escalation, and deposits on larger projects.

Bad debt is a normal part of business. What is not normal is letting it sit on the books without a plan, distorting your financial picture and your tax position. If you are not sure what your receivables are actually worth, that is the right place to start. Book a free call at peterxiacpa.com/book.

Next step: browse the free small business tax deduction guide.