Collection Expenses

Inevitably there will come a time in most every entrepreneur's career when they encounter difficulty collecting an outstanding receivable. That said, before you can classify your outstanding account as bad debt, in most cases you will need to make an effort to collect what is owed to you. Often times, in doing so you will incur some type of collection expense, the good news is these costs will generally be deductible regardless of whether or not you are able to collect your outstanding account.


Vanessa is freelance dance instructor from Manhattan. Last year she provided dance classes for a corporate client looking to promote exercise and the arts. Unfortunately, after Vanessa sent her $5,000 invoice the client became unresponsive. After 90 days of trying to collect on her own, Vanessa hired a collection agency that was successfully able to recover the money, net of a 10% fee. Vanessa would record $5,000 in gross income for the dance classes and $500 of collection costs when she prepares her Schedule C.


In December, Jill, a successful author, sold copies of her new book to five local bookstores for $15,000 with 60 day payment terms. Since Jill prepares her tax return on an accrual basis, she recorded $15,000 of revenue on December 31st. Unfortunately, some of the book stores failed to pay her within 60 days. After 120 days of trying to collect on her own, Jill contacted her lawyer, who is known for being ruthless to people who wrong his clients. After $5,000 of legal fees jill was able to collect $9,000 of the $15,000 owed to her. When she prepares her tax return she can deduct the $5,000 of legal fees as a collection expense on line 17 of her Schedule C and another $6,000 ($15,000 revenue recognized less $9,000 collected) of bad debt expense on line 27a of her Schedule C.


Joshua, a freelance web developer invoiced his client $23,000 upon completing development of a website and mobile application. Unfortunately, the client was unable to pay Joshua since their sole investor chose not to provide any additional funding. Joshua paid a collection agency a flat fee of $1,000 to try and collect his receivable, however, the agency was unsuccessful. Despite not being able to recover amounts owed to him, Joshua will still be able to deduct the full $1,000 he spent attempting to recover his $23,000 outstanding receivable.


Susan is a real estate agent who is known for her ability to close the toughest deals. Last January after receiving a large commission check Susan loaned her friend Kate $30,000 payable on December 31st so Kate could renovate her kitchen. Fifteen months later Susan had spent $2,500 on legal fees but still hadn't collected a dime from her former friend so she informed her accountant she wanted to deduct the legal expenses on her Schedule C. Her accountant explained that while the loan was made for real estate purposes, it was not a business loan and therefore the collection expenses would not be considered a deductible business expense.


Elijah owns a long-term rental property which he rents to a tenant on an annual lease payable in monthly installments. Last year, Eli's tenant lost his job and did not pay any rent for two months prior to his eviction. Eli was determined to collect the outstanding rent so he lawyered up and sued his former tenant. After a month of litigation, Eli was able to recover the two months of unpaid rent and his attorneys fees. At the end of the year, Eli's accountant informed him he would be able to deduct all of his legal fees on his Schedule E, but that he would also have to recognize the two months of rent and reimbursed legal fees as part of his gross rental income.


  • To be be considered a collection expense you should be pursuing money from someone who has caused you to incur an actual loss and who you have a legally binding arrangement and debtor-creditor relationship with.
  • You can generally deduct collection fees regardless of if you are able to recover all, some, or none of the money owed to you.
  • If you pay a collection agency a percent of what they successfully collect (taken off the top) and you are a cash basis taxpayer, you should not deduct your collection expense unless you "gross up" amounts paid to you by the collection agency to the pre-fee collection amount. If you are an accrual basis taxpayer who already recorded revenue for amounts originally billed, you would generally deduct any fees assessed by the collection agency the same as you would any other operating expense.
  • If you pay legal fees in the process of collecting a debt or money due to you these costs are considered collection expenses, however, they are deducible as legal and professional fees, not as other expenses, which is where fees paid to a collection agency could be classified.
  • Collection fees are different from fees you pay to a third party to process your payments (i.e. Stripe, Square, Paypal, etc), while these costs are also deductible they would be considered merchant or transaction fees.

No items found.
© 2024 Hurdlr, Inc.