As an entrepreneur, you have to take the highs with the lows, and taking risks in business is part of the game. Taking out loans or other lines of credit to launch a business, pay employees and grow as a company is inevitable if you don’t have a lot of spare capital lying around.
However, if you can’t keep up with loan repayments, they can feel overwhelming and affect your entrepreneurial vision. The good news is, it’s very possible to write off debt as an entrepreneur, and keep your business dreams going.
In both the UK and the US, there are several solutions to writing off debt as an entrepreneur, many of which you can implement yourself. As an entrepreneur with a business, you can save a lot of money to put towards your debts, if you work out how to offset unpaid invoices from your clients against your tax bills, for example.
In this article, we’re going to cover all the details of how to write off debt as an entrepreneur, so you can find the solution that is best for you and your future.
How can you write off debt as an entrepreneur?
You can write off debt as an entrepreneur in the UK and US by boosting your sales and cutting your costs, making your own debt management plan and creating a budget that allows you to put more money towards paying off your debt.
You can also use methods like debt consolidation and debt refinancing to make your debt more manageable, shortening payment terms with your clients to ensure that they pay you what is due, and write off unpaid debts from clients as losses to save money on tax.
Let’s dive right in, and look at exactly how you can write off debt as an entrepreneur in the US and UK.
9 Steps to write off debt as an entrepreneur
Create your own debt management plan
Forget those ads you keep seeing for companies who want to ‘manage your debt’ for you, you can do it yourself for free! It doesn’t have to be a complicated process, especially if you know how much you owe and whom to. First, you need to bite the bullet and write down all your debt. This is often the hardest part, as you have to be really honest with yourself about how much you owe. If any feelings of shame or anxiety arise just tell yourself that you are taking manageable steps to sort the problem out (which is all that any human being can do), and then let the feeling go.
Putting all your debt into a spreadsheet or document – whether they are credit card debts, business loans or other lines of credit – and organise them by how often you need to make a repayment, and how much interest you have to pay on them – will give you a great sense of control. The problem isn’t taking up space in your head anymore and becoming more awful in your imagination than it actually is – you can see it right in front of you. Now, you can decide which debts to prioritise first. As debt is a psychological problem as well as a financial one, debt experts have suggested two methods.
Debt avalanche method
This method involves you tackling your highest-interest rate debt to start with, i.e. the debt that is costing you the most financially. This then leaves you more financially free to focus on your other debts. Go in order of the highest-interest to the lowest-interest debt to keep the momentum up.
Debt snowball method
Start with your smallest debt first, and move on to your next smallest one after that is paid. By paying off your smallest debt first, you’ll get the endorphin rush that comes with slashing a debt much sooner, giving you the momentum to keep paying off your debt, as you’ll be able to see visually that your debt is going down.
A budget is hugely important way to get control of your debt and finances as an entrepreneur. Whether your debt is a business or personal debt, creating a budget for your outgoings will help you see exactly where your money is going and where you can save money to put towards your debt repayments.
Print off your bank and credit card statements from the last few months, and identify your incomings and outgoings. Examine where you are spending more and how you can reduce your spending. You can use an energy service compare tool like Uswitch.com to see if you can save money by switching your electricity provider, for example, or if you have a lot of business debt, you can try a free budgeting app like Wave to help you organise your business incomings and outgoings.
Boost sales to increase profits
As well as cutting back on business and personal expenses, you can increase your company’s income to pay off your debts faster. To encourage more people to buy your business’ products and services, you could:
- Increase your prices incrementally. If you have or are growing a solid customer base and you have repeat customers, it may be worth increasing your prices. However, you should not do so in a way which is extreme, or you’ll risk losing customers. Although seriously hiking up your prices if you’re in a tight spot financially is tempting, increasing them bit by bit will work better for customer retention in the long run, especially as they already find value in your service. Also, it will have more of an effect on your revenue than you think – it’s true that every little helps.
- Create a customer loyalty plan. Create a service that will benefit your customers, but only if they keep using your business. For example, you could offer a cash-back service for customers, so that for every £1 or $1 they spend with you, they get 5 p or 5 cents back. This could well increase loyalty and repeat customers, as they’ll have to spend more to earn more cash back. The great thing about investing in customer loyalty, is that it will cost you 5 times more to acquire a new customer than it will to bring back an existing one, and returning customers spend 33% more with you than new ones do. It’s a no-brainer really, as you’ll be spending less to get more money to pay off your debts.
- Promote your business on social media. Social Media is an essential way to increase your business’s revenue, as it increases people’s trust in your brand. Your company’s social media presence should be like a friend to customers or followers. This means that you respond quickly to any messages or comments, and focus on your potential clients’ needs and not your own (writing off debt or growing your business, for example). For every one post you make promoting your business, you should make 5-10 which are just pure value for your audience, and not necessarily focusing on your company. This is the perfect, organic way to increase followers, customers and therefore money to pay off your debt.
- Create limited-time offers. The scarcity principle tells us that people always want more of the things that there are less of (remember the great toilet roll hoarding of Covid-19?). So, if you’re a seller of vintage reproduction jewellery, tell your customers that for the next forty-eight hours only they can get two old cut European diamond rings for the price of one while stocks last, and you may encourage them to buy then and there, if they think the opportunity won’t last.
Cut business costs
As well as increasing your revenue, you can cut down on your expenses as a business, and put the money towards paying off your debts. For example, you could:
- Cut down on printing. This may not be an obvious expense to you, but the cost of ink for printers can be huge. Before you print anything think: could this be an email or file attachment? Could I just hop on a Zoom call and explain this to my employee online? Making some simple changes to how frequently you print can help cut a lot of costs.
- Sell off equipment and office supplies you don’t need. If you have an expensive model of a van, for example, and a second hand one could do the job just as well, it may be a good idea to sell the vehicle and get a cheaper one, putting the spare cash towards your debts.
- Make your company permanently remote. If you and your employees are already working from home due to Covid-19, you could cut down a lot of expenses by making this a permanent change. You’d save thousands on office rent and utility bills to put towards your debts. You can always move back to a physical office when your debt is paid off, if you want to.
Chase unpaid invoices
One of the most frustrating things is having a lot of money tied up in unpaid invoices, especially when you have pressing debts to pay. You can change your payment plans so that your clients have to pay in advance or in, for example twenty days rather than fifty. You could also charge a late payment fee for late payments.
Refinance your debt
If you are struggling to pay off a business loan, business debt refinancing could help make the debt more manageable. Debt refinancing (sometimes called ‘loan consolidation’ when you have more debts than one to repay) is when you take out another loan with better terms and more affordable interest, to pay off the business loan you are currently struggling to repay. So your current loan, which could have a higher rate of interest and be draining you financially, gets eliminated and you’re left with a more manageable loan. However, you are not getting rid of your debt, you are simply replacing it with one that’s hopefully easier to cope with, and costs you less in the long run. Just make sure that you read all the terms of your new loan, and check the fine print for any disclaimers that might affect the loan’s affordability. For example, if the new loan offers you a 0% interest-free period, make sure you can afford to pay it off within that time, or you may end up with more expensive interest than before.
Write off unpaid debts as losses
You may owe debts yourself as an entrepreneur, but you may also be owed debts by clients or traders, and this can really cut into your plans to repay your own debt and grow your business. However, there are situations where you can write off these unpaid debts – which are typically called ‘bad debts’, meaning that they can’t be recovered – so that you don’t have to pay as much tax on your profits. Let’s look at how to get bad debts written off as losses in the US and the UK.
How to write unpaid debts off as losses in the US
If you’re an entrepreneur and taxpayer in the US, you can deduct any business receivable (debt owed) that becomes totally or partially worthless during the tax year. ‘Worthless’ means that there’s no or little chance of recovering the full debt, and so there is no value to the invoice.
In order to deduct the loss of the unpaid debt from your tax bills, you have to write off the debt and account for this on your federal tax return. Writing off the amount of the debt will reduce your taxable income, helping you save money to put towards your own debts.
Writing off the debt to reduce the amount of tax you have to pay does not mean that you no longer have the right to collect the debt. You can still pursue the debtor, but if you’ll spend more money chasing the debt that you’ll get in receiving it back, it may not be financially worth it. You can decide to forgive a debt, particularly if your the person who owes you money is insolvent (in financial distress, with no hope of paying what they owe). If you do this, the forgiven debt is seen as part of the debtor’s income for tax purposes, and they may have to pay tax on it.
In order to deduct the value of the bad debt from the amount of tax you may owe the Internal Revenue Service (IRS), you need to have made a reasonable attempt at recovering it, and be able to prove this.
How you go about deducting bad debts from the tax you owe also depends on whether your business uses the cash or accrual method of accounting. If you use the accrual method of accounting (where you view any invoices you’ve sent out to customers as income, whether they are paid or not), it is more straightforward to write off bad debts, as you will have already included them in your income.
If you’re a cash method taxpayer (which means you don’t count your income and revenue until you literally have the cash in your account) it is harder to deduct bad debts, for example, unpaid invoices from your tax bill, as you haven’t accounted for them as part of your income in the first place.
However, you can get around this with notes. A note is a legal document that records that a borrower owes a creditor (you) money. As notes are usually treated as cash in business (and evaluated by their Fair Market Value at the time of receiving them), you can deduct the amount of notes that have been unpaid, if you’ve included their Fair Market Value in your company’s gross income.
You can put any money you save from deducting your losses from the amount of tax you have to pay towards your own debts.
How to write off unpaid debts off as losses in the UK
If you’re an entrepreneur in the UK, you can claim bad debts as losses for tax purposes, whether you’re a sole trader or you own a limited company. These are called ‘allowable losses’, which reduce the amount of tax you have to pay on your business profits, and therefore increase the money you can use to pay off your own debts.
Individuals including sole traders usually pay a tax on your profits called Capital Gains Tax. Simple debts, which the UK government defines as “a straightforward loan or amount owed by one person to another’, are not chargeable assets, which means they are not included in the amount of profit that HMRC sees you to have made, so in theory they aren’t relevant for tax purposes, and shouldn’t add to the amount you have to pay tax on.
If you’ve lent money to a trader (for trading purposes alone) and you didn’t receive the money back you can report this as an ‘allowable loss’ against the profits you’ve made that tax year, reducing the amount of profit that you have to pay tax on. This is helpful, as if you didn’t receive money that you were owed, but you still have to pay tax as though you did, you’re losing out on income that you can use to pay off your own debts, business or otherwise.
If you’re the director of a limited company, you’ll pay a tax called Corporation Tax on any profits the company makes. If your company manages its accounts via cash-based accounting (which means that the company’s revenue and expenses aren’t recorded until they actually occur, and you literally have the payment in your bank), you’ll get automatic tax relief, and won’t have to record any non-payments as income for tax purposes.
If your company uses the accrual accounting method (which means that as soon as your business makes a sale, it is counted as income whether you’ve received the payment or not), the unpaid debts you are owed are recorded as income even if you didn’t receive the money. You can report these as losses and reclaim the sum of the debt from the corporation tax you have to pay, minus VAT.
Don’t bank where you have debts
If you’re an entrepreneur struggling with debt, you may well owe money to your bank, for example, through bank loans or overdrafts. This is understandable as many of us need to borrow money to start a business. However, if you’re trying to get out of debt, it’s really important not to continue to deposit and withdraw money from the accounts you owe money to.
This is because in both the US and the UK, banks can exercise something called the right to offset. This allows banks to withdraw money from any of your accounts, for example, your checking or current account, or your savings account, to pay the account which you owe. This is even the case if you open a bank account with a bank that is affiliated to the bank you owe money to, or is in the same banking group. So, when you start to repay your debts and set aside some of your income to do so, make sure it is at a financial institution which is totally unconnected to the one you owe.
Arrange time to repay your debts
If you’re an entrepreneur in the US or the UK and you owe money in business taxes, you can contact your tax authority (HMRC in the UK and the IRS in the US) for more time to repay your tax debts. You can then use this time to work out a plan for getting out of the debt.
Time to pay arrangements (TTP) UK
If you’ve built up business tax debt that you are struggling to repay, don’t ignore contact from HMRC.
The best thing to do is take action to get your debt sorted out, and you will feel so much better as soon as you do this.
A Time To Pay arrangement helps you spread your business tax payments over a longer period of time in a more affordable way.
You’ll agree when to make repayments with HMRC, and the longer payment times will give you more breathing space and free up more cash flow for your business.
IRS payment delays
If IRS decides that you can’t pay your tax debt, they can report your account as currently not collectible, and temporarily delay collection until your finances improve.
This will give you time to decide how to sort the debt in a way that works best for yourself and your business.
You’ll still be liable for the debt, but you won’t have to pay it immediately. To request a delay on collection, you’ll need to contact the IRS, who may ask you to complete a Collection Information Statement (Form 433-F PDF, Form 433-A PDFor Form 433-B PDF).
If the IRS do agree to delay payment, your debt will still accrue penalties and interest until the full amount is paid.
In some situations, the IRS will give you a Notice of Federal Tax Lien, which means that the government has a right to use your assets (for example, personal property or financial assets) to repay your debt if you fail to repay them yourself even with your payment delay.
The IRS generally has three types of payment delay plans, The first is called a Simple Payment Plan, for tax bills up to $50,000. These will not usually trigger a Federal Tax Lien. The other two are Payment plan for balances between $50,000 and $100,000 and Payment plan for tax bill of more than $100,000 OR currently not collectible status, which will trigger Federal Tax Liens on your property.
If you’re worried about accessing credit for your business as an entrepreneur with tax debts, the IRS says that simply taking out a payment plan with them does not mean that they will automatically report it to credit bureaus (which would potentially harm your credit score). However, a Federal Tax Lien may be visible to potential lenders.
Now that we’ve gone through all the different ways you can write off debt as an entrepreneur, we hope you’ve found it a useful read. Remember that, although debt can feel daunting, it is very possible to get out of it and make your business dreams flourish. Keep focusing on your amazing, entrepreneurial vision as you chip away at your debt, and remember that it never defines you.