When can you deduct a business bad debt?

It happens to butchers, bakers, and candlestick makers. It probably happens in your business, too: A customer doesn’t pay what they owe and you end up with a bad debt. Can you take a tax deduction?

The answer depends on how you account for income on your tax return. If you included the amount due from the customer in income this year or in previous years, it’s likely you have a bad debt deduction. You can claim all or part of the worthless receivable.

What if you record income as you collect the cash? In this case, since you don’t receive the amount your customer owes you, and since you never reported it as income, there’s no deduction.

Suppose you lend money to a customer for a business reason and the loan becomes uncollectible. Is the loan considered a deductible bad debt?

As a general rule, yes, as long as your intention was to make a loan, not a gift, and you attempted to collect the debt but could not. Money you lend to employees or suppliers may also be deductible.

Though you don’t have to go to court to prove a debt is uncollectible, the deduction can only be taken in the taxable year it becomes worthless. If you overlook the deduction on that year’s return, don’t despair. For a fully worthless bad debt you have up to seven years from the due date of your original return to file an amended one.

Additional rules apply to specific situations, and certain businesses can use a special method for claiming bad debt deductions. Give us a call to discuss your options.

About Brenda J. McGivern, CPA

Brenda McGivern started her own certified public accounting and management consulting firm in October 2001. The full service CPA firm provides tax and accounting solutions to meet the needs of today’s small business and individual. Brenda McGivern has become a trusted advisor and valuable resource her clients rely on for timely, accurate assistance when they need it.

Before starting the firm, she worked as an accountant for three years at a local firm and prior to that five years at a large international CPA firm in Boston. She has performed the following tax services: federal, state and local tax planning, international tax planning, estate and succession planning, mergers and acquisitions, capital retention and IRS representation. She has also coordinated assurance engagements, such as financial statement audits, reviews and compilations from the planning phase through the reporting phase. She has prepared and reviewed regulatory filings for numerous regulatory agencies including the Security and Exchange Commission.

Prior to these positions she was selected from over 2,000 candidates into an eight-person intensive financial management program at an international technology company. The program consisted of graduate level classroom study and two six-month rotational assignments in financial operations.

She graduated cum laude from the University of Massachusetts at Amherst and holds a Bachelors Degree in Business Administration with a concentration in accounting. McGivern also holds a license in Massachusetts as a Certified Public Accountant and is a member of the American Society of Certified Public Accountants and the Massachusetts Society of Certified Public Accountants. She resides in Stoughton, Massachusetts with her husband Brian, and their sons Sean, Ryan and Conor and their dog, Davis.

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