Can Doctors Write Off Unpaid Bills?
Uncover how medical practices account for and manage uncollected patient payments, including tax considerations for financial write-offs.
Doctors face challenges with unpaid bills. When patients don’t pay, practices often wonder if they can “write off” these amounts. Writing off an unpaid bill means treating it as a “bad debt” for financial and tax purposes, impacting profitability and tax obligations.
Understanding Bad Debts for Medical Practices
A “bad debt” in a medical practice context represents income earned but now considered uncollectible. The ability to write off such a debt depends on the accounting method the practice uses. Medical practices typically operate using either the cash basis or the accrual basis of accounting.
Under the cash basis method, income is recognized only when cash is received, and expenses are recorded when cash is paid. If a cash basis practice never receives payment for a service, that income was never recorded. Therefore, they cannot claim a bad debt deduction for unpaid bills, as the income was never reported, meaning no loss to deduct.
In contrast, the accrual basis method recognizes income when earned, regardless of when cash is received, and expenses are recorded when incurred. For an accrual basis medical practice, patient services generate accounts receivable, recognized as income at the time of service. If these receivables later become uncollectible, the practice has recognized income it will not receive, creating a deductible bad debt.
Criteria for Deducting Uncollectible Patient Balances
For an unpaid patient bill to qualify as a deductible business bad debt for tax purposes, specific conditions set by the Internal Revenue Service (IRS) must be met. The debt must have originated from the practice’s trade or business, meaning it arose directly from services provided to patients. It must also be truly worthless and uncollectible, not merely difficult to collect.
Demonstrating worthlessness requires evidence of reasonable collection efforts. Such efforts might include sending multiple statements, making collection calls, and attempting to reach the patient to arrange payment. While legal action is not always necessary, the practice must show that such action would likely be futile. The debt must be entirely worthless for a full write-off, although business bad debts can sometimes be partially deducted if a portion becomes uncollectible.
Accounting and Tax Reporting for Bad Debts
For accrual basis medical practices, writing off a bad debt involves specific accounting entries. When a patient account is deemed uncollectible, the practice typically debits a “Bad Debt Expense” account and credits the “Accounts Receivable” account. This entry reduces the practice’s reported assets and recognizes the expense associated with the uncollectible amount. The bad debt expense appears on the practice’s income statement, reducing its net income.
For tax reporting, business bad debts are generally deductible as ordinary business expenses. Sole proprietors and single-member LLCs report these deductions on Schedule C (Form 1040), “Profit or Loss From Business.” Corporations, including LLCs taxed as corporations, report bad debts on their applicable business income tax returns, such as Form 1120 for C corporations or Form 1120-S for S corporations. Partnerships report bad debts on Form 1065. If a debt previously written off is later collected, that recovered amount must be reported as income in the year it is received.
Managing Unpaid Patient Bills
Beyond the technical accounting and tax write-off processes, medical practices implement strategies to manage and minimize unpaid patient bills. Proactive measures can include establishing clear financial policies and discussing costs upfront with patients. Offering flexible payment options, such as payment plans, and verifying insurance coverage before services are rendered can also significantly reduce the likelihood of unpaid balances.
Collection agencies serve as a last resort for practices attempting to recover outstanding amounts. If a debt is sold to a collection agency, it may no longer be a bad debt for the original practice, as the practice has effectively “sold” the debt. Consistent follow-up on outstanding balances and meticulous documentation of all collection efforts supports any eventual bad debt write-off and helps prevent future payment issues.