USA Does bad debt reduce taxable income?

[presvinay]

I work for a clinic that accepts health insurance, but sometimes the insurance doesn't pay and the patient is liable to pay, but the patient doesn't end up paying. This basically means we paid the doctor to perform services for free, and we are keeping track of this number (via aging report) as our billing company has said it can be used as a tax write-off (although I don't know if that's necessarily true).

I think some medical clinics use bad debt to help reduce their taxes.

As bad debt only counts against your A/R, and you don't get taxed on A/R, how does bad debt help reduce taxable income? Does it count as a charitable deduction?

I feel like calculating A/R would be beneficial (for tax purposes, obviously it's good to know your bad debt amt regardless of whether it can reduce your taxable income) if using accrual-basis accounting. Since companies are allowed to record revenue on their income statement as soon as they have done everything required to earn it, I'm assuming reporting bad debt would be a deduction against income, thereby reducing taxable income.

Since we are using cash basis, I don't see how calculating bad debt will allow us to write off anything on taxes.

Maybe I need a basic accounting lesson, but this is really puzzling me.

 

[kirby]

Let 's start with you being on cash basis. If so, and insurance never paid then you should have never recorded the income. So no AR on the books to write off. Is that the case in your company?

 

[bklynboy]

Not sure it applies but to me since you provided the service and were never paid for it I do see how this can be called a write off even if on cash accounting. I look at it as a cash service was performed and you paid your doctors for it and expected a repayment that never materialized. To me that's a write-off

 

[presvinay]

Let 's start with you being on cash basis. If so, and insurance never paid then you should have never recorded the income. So no AR on the books to write off. Is that the case in your company?

When insurance doesn't pay, the patient is liable, and when the patient doesn't pay, we can write that amount off.

My biller says that when we bill $75 for a service, and the insurance pays, $55, the $20 dollar difference is a write off. But my CPA says this isn't true..