We are a C-corp and entered a $86,000 bill from a subcontractor with our 2016 tax return. It turns out that we don't have to pay the bill, we settled the liability and it's reduced to zero.

At what point ( from a tax law perspective) and how (from an accounting perspective) do we have to take the invoice off the books and how can it impact tax liability in 2017 or the future?

We are a C-corp and entered a $86,000 bill from a subcontractor with our 2016 tax return. It turns out that we don't have to pay the bill, we settled the liability and it's reduced to zero.==============>>then you need to amend your biz return for 2016 to reduce your biz related expenses of $86K. You need to make corrections if you made a large error on the original tax return. The mistake affects your tax liability if you do not correct it. The IRS does say you should consider amending a tax return if your filing status, income, deductions, or credits are incorrect. however, it is up to you.

At what point ( from a tax law perspective)====>on your 2016 retrun

and how (from an accounting perspective) do we have to take the invoice off the books =======>>I guess you debit A/P and credit service expense or After cancelling payable invoice -->Payable transfer to GL. etc.I mean Invoice entered
Dr Expense\Charge a\c
Cr Ap Liability a\c

Invoice cancelled
Dr Ap Liability a\c
Cr Expense\Charge a\c

Both will get transferred to GL.
The net effect being Zero


and how can it impact tax liability in 2017 or the future?=================>> impact on 2017 or the future return, as said you need to file amended biz return for 2016.

much appreciated!