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Claiming a Business Bad Debt

  • 11 November 2014
  • Author: Cari Holbrook
  • Number of views: 2910
Claiming a Business Bad Debt

Running a family business requires management of the occasional debt. Once money is owed to you that cannot be paid, “regular debt” turns into “bad debt.” Writing off bad debt isn’t pleasant but, thankfully, the Tax Code allows you a deduction  for it. Bad debts closely tied to running your business may be deducted on a business income tax return, as long as they fall within certain guidelines.  In fact, these debts may be deducted in part or in full, and can be claimed using either a specific charge-off method or a nonaccrual-experience method -- whatever is best for your situation.

If you answer “yes” to one or more of the following questions, consider a strategy to claim the business debt on your next tax return:

1.     Is the debt one that comes from operating your trade or business?

2.     Is it a long-standing credit sales debt? Meaning, did you sell goods or perform services that were never paid for, even after a reasonable amount of time and effort to collect?

3.     Was it part of a loan to a customer, client, previous partner, or supplier; or was it a business loan guarantee that was never honored?

4.     Was it debt acquired from a decedent, a previous business, or a liquidation of your business?

5.     Did it stem from the sale of a mortgaged property that was tied to the business?

6.     Did you previously report the amount owed to you as part of your gross income? (This is common with the accrual method of accounting, or reporting income as your earn it. If you use the cash method of accounting, you may claim a bad debt deduction if you actually loaned the funds from your business. Otherwise, if the debt arose from the sale of products or services, it probably will not be deductible because you never included those amounts in income.)

In some situations, bad debts seemingly associated with the business turn out to be personal bad debts. This may happen when the business is an S Corp or set up as a non-corporation structure. Can they be deducted? It depends on several factors, but personal bad debts must follow other strict guidelines. In any case, contact us to review the debt and determine a strategy to turn the bad debt into a smaller tax bill.

Image Copyright: stokkete / 123RF Stock Photo

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