Business Bad Debts

Business Bad Debts

Business accounts receivable that have been included in income that are uncollectible, legally binding debts owed to you that are uncollectible, and debts you must pay that you guaranteed in connection with your business or for a profit may be deductible as bad debts.
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Business bad debts result in ordinary losses; nonbusiness bad debts result in short-term capital losses.
You can deduct business bad debts that are partially or wholly worthless, but you must have proof that a debt is uncollectible.
Unlike business bad debts, IPC section 166(a)(1)(a) provides that partial worthlessness of a nonbusiness bad debt will not produce a deduction.
Business bad debts are fully deductible in the year they become partially or entirely worthless (Secs.
1933), addressed the specific charge-off requirement and noted that Congressional intent was to allow a deduction for business bad debts in the year in which ascertained worthless, provided there was "some specific act of the taxpayer clearly indicating their abandonment as assets.
However, payments made by partners on behalf of their partnerships were business bad debts when the partners' payments were in furtherance of the partnership's business.
Thus, subsection (a) allows an ordinary loss deduction only for business bad debts.
For individual taxpayers, bad debts are either (1) business bad debts, deductible as ordinary losses, or (2) nonbusiness bad debts, deductible as capital losses.
Business bad debts can also take the form of loans to suppliers, clients, employees and distributors.
Business bad debts that are completely or partially worthless are deductible as ordinary losses, while nonbusiness bad debts are short-term capital losses only when entirely worthless.
A debt is classified as a business bad debt if the taxpayer is engaged in a trade or business and, at the time the debt was acquired, created or became worthless, the debt was proximately related to that trade or business (there must be a dominant business reason--and not merely a significant one--for the loan).
The Tax Court held that the partner's loan to the partnership was deductible as a business bad debt.

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