Bad Debts
If someone owes you money=
that
you cannot collect, you may have a bad debt. To deduct a bad debt, you must
have previously included the amount in your income or loaned out your cash.=
If
you are a cash basis taxpayer, as most individuals are, you may not take a =
bad
debt deduction for income you expected to receive but did not because the
amount was never included in your income. For a bad debt, you must show that
there was an intention at the time of the transaction to make a loan and no=
t a
gift.
There are two kinds of ba=
d debts
- business and non-business. A business bad debt, generally, is one that co=
mes
from operating your trade or business. A business deducts its bad debts from
gross income when figuring its taxable income. Business bad debts may be
deducted in part or in full.
All other bad debts are
non-business. Non-business bad debts must be totally worthless to be
deductible. You cannot deduct a partially worthless non-business bad debt. =
You
must establish that you have taken reasonable steps to collect the debt and=
the
debt is worthless. It is not necessary to go to court if you can show that a
judgment from the court would be uncollectible. You may take the deduction =
only
in the year the debt becomes worthless. A debt becomes worthless when the
surrounding facts and circumstances indicate there is no longer any chance =
the
amount owed will be paid. You do not have to wait until a debt is due to
determine whether it is worthless.
A non-business bad debt is
reported as a short-term capital loss. Your net capital loss is limited to
$3,000 per year. This limit is $1,500 if you are married filing a separate
return. A non-business bad debt deduction requires a separate detailed
statement attached to your return.