As the owner/landlord. If I remove late fees from my tenants...

[William Hayes]

I have a question. If I remove the late fees to help my tenants due to COVID... Can I claim them as a loss? And if so, how do I document it?

[Linda Weygant]

It's always interesting how people are quick to jump on a potential deduction without understanding the ramifications.

Let me see if I can break it down.

There are two types of accounting at play here - Accrual Accounting and Cash Accounting.

Most individual landlords are required to report on the Cash Basis.  This means that income is recognized when received and expenses are recognized when paid.

Under this method, you do not deduct uncollected rent or late fees.  It never happened, so you just don't do anything with that from a tax standpoint.

Some landlords report on the Accrual Basis.  This means that income is recognized when it is earned and expenses are recognized when they are incurred.  

So, for example, if rent is due on December 1, you claim that as income on December 1.  If the tenant doesn't pay it until February 15 the next year, it doesn't matter.  You pay tax as the rent was earned.

In this scenario, if you decide on February 15 of the following year that the tenant is never going to pay - THEN (and only then) do you deduct that as Bad Debt Expense.  

So to sum up - yes, you can make an election to report on the accrual basis in which case you do write off unpaid rent and late fees, but only after you have already declared that as income (making it a net wash) OR you elect to report on the cash basis in which case nothing exists until money exchanges hands.

You cannot flip flop between the two methods.  If you choose a method up front, you can elect to change it, but it's quite involved and you have to ask permission from the IRS to do so and provide a good reason for it.