Business Bad Debt

Business Bad Debt

A bad debt an individual incurs in an activity related to his/her primary line of work. For example, a mechanic might repair a car and allow the owner to pay on credit. If the mechanic does not collect payment, he incurs a business bad debt. In American tax, business bad debt is completely deductible, even if the debt has some remaining value. This contrasts with non-business bad debt, which is only deductible when entirely worthless.
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The Tax Court held that a taxpayer properly took a deduction for a business bad debt.
Careful tax planning that maximizes the business bad debt deduction can help minimize the taxpayer's overall economic loss.
On the other hand, if the dominant motive behind the loan or loan guarantee was to protect the shareholder's status as an employee, the loss is a business bad debt, which is fully deductible when the debt becomes worthless.
A deduction for the partial worthlessness of a business bad debt is also permitted.
Cooper did not report the loan as a bad debt in the amount of $750,000 on his original return but included it as a business bad debt deduction in an amended return he filed in 2010.
On his personal income tax return, the taxpayer deducted the unpaid loans as a business bad debt.
The shareholder can claim a business bad debt loss when the loss from a worthless debt is incurred in the shareholder's trade or business (Sec.
He deducted the loss as an ordinary loss under IRC section 165(a) and (c)(1) and as a business bad debt under IRC section 166(a).
Whether a taxpayer can claim a business bad debt or a nonbusiness bad debt is particularly important and can lead to a different result on the tax return.
If the note is issued by a noncorporate, nongovernmental entity, and it is a business bad debt for a noncorporate holder, the loan is not a security under Sec.
A business bad debt arises from a debt created or acquired in connection with a taxpayer's trade or business, or from the worthlessness of a debt incurred in the taxpayer's trade or business.
The taxpayer claimed business bad debt losses on his personal income tax returns (Forms 1040, U.

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