id = "bad-debt-direct-write-off"
title = "An invoice that will not be collected is written off, in parts"
rule = "A debt that becomes worthless MUST be written off in the year it becomes worthless, a partial write-off MUST be deductible to the extent charged off, and no write-off may exceed what is owed."
status = "CHOICE"
sources = [
  "IRC §166(a)",
  "IRC §111",
  "Treas. Reg. §1.166-1(e)",
  "Treas. Reg. §1.166-2(a)",
  "Treas. Reg. §1.166-3(a)",
  "plan/served.md 8.3.1 A-5: the direct write-off method",
  "ASC 326-20 (noted: an allowance is the GAAP preference)",
]
tags = ["accrual", "book", "us", "receivables"]

[setup]
currency = "USD"
fiscal_year_start = "01-01"
basis = "accrual"
rounding = "half-even"

[[setup.accounts]]
code = "1000"
name = "Checking"
type = "asset"

[[setup.accounts]]
code = "1200"
name = "Accounts Receivable"
type = "asset"

[[setup.accounts]]
code = "4000"
name = "Revenue"
type = "revenue"

[[setup.accounts]]
code = "6990"
name = "Bad Debt Expense"
type = "expense"
tax_category = "bad_debts"

# The work was done and billed: the invoice is income already counted.
[[events]]
date = "2026-01-10"
description = "Survey work"
invoice = { customer = "Ridgeway Co", amount = "100.00" }

# Part of it is charged off when the collection efforts end; the rest
# stays owed and aged.
[[events]]
date = "2026-03-15"
write_off = { invoice = 1, amount = "40.00", reason = "No answer; the collection agency closed the file" }

# The liquidation notice makes the rest worthless, and it is written off.
[[events]]
date = "2026-04-20"
write_off = { invoice = 1, amount = "60.00", reason = "Liquidation notice received" }

[[expect]]
query = "balances"
as_of = "2026-12-31"
[expect.values]
"1000" = "0.00"
"1200" = "0.00"
"4000" = "100.00"
"6990" = "100.00"

[[expect]]
query = "trial_balance"
as_of = "2026-12-31"
[expect.values]
"1000" = "0.00"
"1200" = "0.00"
"4000" = "-100.00"
"6990" = "100.00"