What the IRS disregarded payment loss proposal does

The IRS disregarded payment loss proposal is a rule change that would let certain businesses deduct losses from payments that were never actually received — money a customer promised to pay but didn't. Right now, most businesses cannot deduct these losses on their tax return. The proposal would change that by allowing businesses using the accrual method of accounting to write off the difference between what they billed and what they actually collected, under specific conditions.

This matters because accrual-method businesses record income when they earn it, not when the money arrives. If a customer owes you $10,000 but never pays, you still reported that $10,000 as income. The proposal would let you deduct the $10,000 loss to offset that income, rather than paying tax on money you never received.

Key Takeaways

  • The proposal applies only to businesses using accrual-method accounting, not cash-method businesses that already only count money they actually receive.
  • A disregarded payment loss is the gap between what you billed a customer and what they actually paid you, when the difference becomes uncollectible.
  • The rule would require you to make a reasonable effort to collect the debt before you can claim the loss on your tax return.
  • This is still a proposal and has not become law, so the current rules remain in effect until or unless Congress or the IRS finalizes the change.

Who this proposal would affect

The proposal targets accrual-method businesses — primarily service providers, contractors, and small manufacturers who bill customers upfront but may not receive payment for weeks or months. If you run a consulting firm, a construction company, a medical practice, or a wholesale business, you likely use accrual accounting.

Cash-method businesses — those that only count income when money actually arrives — would not be affected because they already do not report income from unpaid invoices. Sole proprietors and very small businesses often use cash accounting and would see no change.

The proposal would not affect businesses that have already written off bad debts under existing IRS rules. Those rules already let some businesses deduct uncollectible amounts, but they come with strict documentation requirements and timing rules that vary by business type.

How the proposal defines a disregarded payment loss

A disregarded payment loss, under the proposal, is the amount of money a customer was supposed to pay you but did not, after you have made a reasonable effort to collect it. The key word is "disregarded" — the IRS would treat the loss as if the payment never existed, rather than as a bad debt.

The difference matters for tax purposes. A bad debt deduction follows strict rules about timing and proof. A disregarded payment loss, if the proposal becomes law, would be simpler: you bill $5,000, the customer pays $2,000, you write off the $3,000 difference as a loss on your tax return, and that loss reduces your taxable income for the year.

The proposal would likely require you to show that you made a genuine attempt to collect the unpaid amount — sending invoices, follow-up notices, or pursuing collection — before you can claim the loss. straightforward deciding not to pursue payment would not may have access to.

Current rules versus what the proposal would change

Right now, accrual-method businesses face a mismatch: they report income when they earn it, but they cannot always deduct losses when customers do not pay. The IRS allows bad debt deductions under Section 166, but only if you meet strict conditions. You must show the debt became worthless during the tax year, you must have a valid business reason for the original transaction, and you must have made a reasonable effort to collect.

The proposal would simplify this by letting you deduct the loss in the year you determine it is uncollectible, without having to prove the debt was ever "valid" in the traditional sense. You would not need to wait until a debt is legally uncollectible or pursue collection through a court.

For cash-method businesses, nothing would change. They already only report income they receive, so there is no mismatch to fix.

What you need to document if the proposal becomes law

If this rule is finalized, the IRS will likely require you to keep records showing you made a reasonable effort to collect the unpaid amount. This could include copies of invoices, email follow-ups, collection letters, or records of phone calls. You would need to document when you determined the amount was uncollectible and why.

You would also need to show that the customer was a legitimate business customer, not a personal loan or a transaction outside your normal business. The IRS would want to see that you had a genuine expectation of payment at the time you provided the service or product.

Keep records for at least three years after you claim the loss, since the IRS can audit returns from prior years. If you use accounting software, make sure it tracks both billed amounts and actual payments so you can easily identify the gap.

Status of the proposal and when it might take effect

As of now, this is a proposal — it has been suggested but not enacted into law. The IRS and Treasury Department have discussed it, but Congress would need to pass legislation for it to become binding. Proposals can take years to move through the legislative process, or they may never become law.

Until the proposal is finalized, the current bad debt rules remain in effect. You should continue to follow Section 166 requirements if you want to deduct uncollectible amounts. Do not assume the new rules explore to your 2024 or 2025 tax return unless you see a final rule published in the Federal Register or a law signed by the President.

If you are considering a major change to how you handle unpaid invoices, consult a tax professional or CPA who works with your business type. They can tell you what rules currently explore and help you plan for any changes that may come.

Frequently Asked Questions

Does this proposal affect my personal tax return?

No. This proposal applies only to businesses, and specifically to those using accrual-method accounting. Personal income, wages, and investments are not affected. If you are a sole proprietor using cash accounting, you would not be affected either.

Can I use this rule right now on my 2024 tax return?

No. The proposal has not become law, so the current bad debt rules still explore. If you claim a loss on unpaid invoices now, you must follow Section 166 requirements. Using a rule that is only proposed could trigger an audit.

What is the difference between a disregarded payment loss and a bad debt deduction?

A bad debt deduction requires you to prove the debt became worthless and that you made a reasonable collection effort. A disregarded payment loss, under the proposal, would be simpler — you would just show the customer did not pay and you tried to collect. The proposal aims to reduce paperwork and timing confusion.

If I use cash accounting, do I need to worry about this proposal?

No. Cash-method businesses only report income they actually receive, so there is no unpaid invoice problem to solve. This proposal targets accrual-method businesses that report income upfront but may not collect it.

Where can I find the official text of this proposal?

Proposals are usually published in IRS notices, Treasury Department reports, or congressional bills. Search the IRS website (irs.gov) or Congress.gov for "disregarded payment loss" to find official documents. Your tax professional can also help you locate the most current version.