Tax Treatment of Income Not Received?

[AgeOfEnlightenmentSCP]

My tax pro is bogged down, but I'm trying to get my stuff together for tax time-- I have a small issue that I'd like to resolve RE: tax implications:

1. A subcontractor of mine quit up north and I took over his duties personally to keep the client happy.

2. As a result, I was expecting to be paid for the work completed as agreed by my client.

3. The client ordered certain services and deducted them from the total owed. I disagree with this, but it's not the hill I want to die on. They are no longer a client- so, there's that.

4. As a result the invoice reads for example- $100 - $25 for whatchamacallit report = $75 paid.  

5. Although I'm not going to chase them around for the $25 bucks (it amounted to $4,500), I am wondering if I can write it off since we were not paid as agreed and then turn around and 1099 our former client for the "expense"? 

[mroped]

Couldn't you write it as a loss?
I know a had done work for a contractor and got paid with a check that never cleared.
At tax time I asked the accountant and he said that I could declare it as a loss.
Since you had a bill to your client and he deducted from the tab you either call it a loss or modify the invoice to reflect "change orders"- that assuming that you agreed with the extra services the client purchased.

[Ombud]

Your employee failed to provide services as contracted & you'd like to penalize client?!?

Why couldn't you just subtract it from COGS if cash based business / enter as account receivable if accrual? Why make it hard?

[TheOtherMe]

If you are cash basis, your deduction is in the cost of goods sold. 

If accrual, yes, it's in accounts receivable, but you'd have to attempt to collect to write off.

[taxref]

If I am understanding the situation correctly, the end issue is that you invoiced your client $X, but he only paid you $Y.  If that is correct, the details about your subcontractor difficulties are extraneous.  How the amount the client refuses to pay is recorded depends on whether you are a cash or accrual basis taxpayer.

If you are on the cash basis, you cannot deduct the unpaid amount as an expense.  That is because bad debts must have first been recognized as income to be an expense, and income is recognized on a cash basis only when it is received.  Rather, you would instead record a sale in the amount of $Y.  

If you are on the accrual basis, you would record a sale of $X, and a bad debt expense in the amount of $X - $Y.  The bottom line is the same both ways, but recording a bad debt expense on a cash basis company is a major red flag.

You would not send a 1099 to your former client regarding the unpaid amount.  A 1099-C reports cancellation of debt, but 1099-Cs are only to be issued by companies whose primary business is financial (for example, banks and finance companies).