The tax treatment of a business's bad debt depends on whether your business uses the cash or accrual method of accounting for tax purposes. Cash method businesses record revenue when they receive cash, regardless of when they earn the revenue. Accrual method companies record revenue when they earn it, regardless of when they receive cash. Most small businesses use the cash method, but this can vary so check with your accountant or tax preparer if you aren't sure. Cash method businesses cannot deduct bad debts from credit sales to customers, which are the most common business bad debt. Cash method companies only recognize income when they receive payment, so if they never receive payment, they report no income from the transaction in the first place. Claiming a deduction for bad debt on income they never recognized as revenue would create a double benefit, so cash method businesses cannot do so. However, if a cash method company incurs bad debts from other sources—such as loans—it can deduct the loss. In this case, the business had an actual outlay of cash that the debtor never repaid. Accrual method companies can deduct bad debt provided they previously included it in their income. Accrual method businesses report income as they earn it, so they can deduct bad debt on credit sales to customers. Accrual method service providers in specific fields—such as law and accounting—can exclude from income the portion of revenue they won't collect based on prior experience. These companies reduce their revenue rather than writing off specific bad debts. Businesses must stay under a gross receipts threshold to use this method, which comes with its own accounting rules.