What is a write-off?

A write-off is the accounting action of removing an uncollectible receivable from the books and recognizing it as bad debt expense. For consulting firms, write-offs typically occur after exhausting collection efforts on accounts 90-180+ days past due. While write-offs are tax-deductible, they represent lost revenue and profit. Tracking write-offs by client type and project characteristics helps identify patterns to prevent future losses.

Key characteristics

• Formally removes receivable from the balance sheet when deemed uncollectible

• Creates bad debt expense on the income statement

• Tax-deductible in the year the write-off is recorded

• Typically occurs after 90-180 days of failed collection efforts

• Requires documentation of collection attempts for tax purposes

• May be partially recovered later (recorded as income if collected)

Why it matters for service firms

Write-offs represent the final acknowledgment of revenue that won't be collected, making prevention far more valuable than the tax benefit of the deduction. The tax deduction recovers only 20-37% of the loss, depending on the tax bracket. A $30,000 write-off for a firm in the 25% bracket provides only $7,500 tax benefit while losing $22,500 in absolute value. Patterns in write-offs reveal which client types, project structures, or payment terms create the highest risk.

Real-world example

Keystone Consulting reviews 3 years of write-offs totaling $78,000: $45,000 from startup clients (58% of losses from 12% of revenue), $23,000 from fixed-fee projects with scope disputes (30%), and $10,000 from various causes (12%). The pattern is clear: startups and poorly scoped fixed-fee projects drive most losses. The founder implements changes: milestone billing tied to deliverable acceptance for fixed-fee work, and 40% upfront payment for all startup engagements. Write-offs decline from $26,000 to $8,000 annually, while the $7,800 tax benefit from the old higher write-offs is far exceeded by the $18,000 in preserved revenue.