Business Bad Debts
If you own or operate a business, chances are you have had an issue collecting a debt. If there comes a point where you cannot collect what you are owed, you may be able to deduct the debt rather than just write it off.
There are some rules that must be followed to deduct bad debts rather than just write them off. First, the debt must be legitimate. The business must be a able to show that goods or services were exchanged and a debtor-creditor relationship was formed. Further, the business must be able to show there was an expectation of repayment and there was intent to collect the debt.
Two types of bad debt deductions are allowed by the IRS. These are business bad debts and non-business bad debts. Business bad debts are counted as ordinary losses and can offset taxable income on a dollar-for-dollar basis. Non-business bad debts are considered personal and are considered short term capital losses.
If a business sells goods or provides a service on credit and the debt becomes worthless, a business bad debt deduction is permitted, but only if the revenue arising from the receivable was previously included as income. Business bad debts can also take the form of loans to suppliers or other people related to the business. These loans can also be deducted as bad debts if collection becomes impossible and the loans become worthless. Sometimes you do not even have to sue to try and collect the debt. When surrounding circumstances indicate a debt is now worthless and that legal action to collect the debt would probably not result in collection, proof of these facts is usually adequate to justify the deduction.
If you own or operate a business, chances are you have had an issue collecting a debt. If there comes a point where you cannot collect what you are owed, you may be able to deduct the debt rather than just write it off.
There are some rules that must be followed to deduct bad debts rather than just write them off. First, the debt must be legitimate. The business must be a able to show that goods or services were exchanged and a debtor-creditor relationship was formed. Further, the business must be able to show there was an expectation of repayment and there was intent to collect the debt.
Two types of bad debt deductions are allowed by the IRS. These are business bad debts and non-business bad debts. Business bad debts are counted as ordinary losses and can offset taxable income on a dollar-for-dollar basis. Non-business bad debts are considered personal and are considered short term capital losses.
If a business sells goods or provides a service on credit and the debt becomes worthless, a business bad debt deduction is permitted, but only if the revenue arising from the receivable was previously included as income. Business bad debts can also take the form of loans to suppliers or other people related to the business. These loans can also be deducted as bad debts if collection becomes impossible and the loans become worthless. Sometimes you do not even have to sue to try and collect the debt. When surrounding circumstances indicate a debt is now worthless and that legal action to collect the debt would probably not result in collection, proof of these facts is usually adequate to justify the deduction.