It is an unfortunate fact of business life that sometimes you will not be paid in full for work you have done. The silver lining is that there are some tax break that can come along with a bad debt.
The first thing you have to do is make sure that the debt can be officially considered as bad for tax purposes. This means you cannot have “forgiven” the debt, meaning that it must still be formally recorded as an outstanding amount owing to you and unrecovered. It is also necessary for you to demonstrate that you have taken reasonable steps to recover the amount. In some cases this may involve legal action, depending on the size and type of debt. You must also make a written record of the decision to write off the debt prior to the end of the financial year.
If the amount owed has been included in your assessable income then you may be able to claim the bad debt as a tax deduction, thereby reducing your tax liability.
The procedure for writing off bad debts can be complicated and it is advisable to seek professional advice in the process, especially in order to make sure that your debt can be officially recorded as bad.