I often have cash basis service providers tell me they want to “write off” amounts that they never collected for services provided. For example, a consultant does work for a client and sends an invoice for $5,000. The client never pays; the consultant wants to “write off” the $5,000. Since the consultant is on the cash basis, I get to have the pleasant conversation with him/her that since they never recognized the $5,000 in income, they have nothing to write off. You have no “tax basis” in your time. I tell them that if they recognize the $5,000 in income, then they can “write off” the bad debt, which gets them to exactly the same place they are now, except my time has been wasted in addition to their time.
The reason you are reading this right now, is that someone actually made it to court with this issue – which absolutely amazes me. The case involved theft losses claimed in a Ponzi scheme, so this issue regarding writing off fees not collected from the scammers may not have been the primary matter in the case, but nonetheless. The moral of the story? Don’t be surprised if your service provider asks for up-front payments or retainers.
By Bradley Dimond, CPA