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Bad Debts

No one thinks that the loans they make to others will go unpaid; otherwise, such loans would not be made in the first place. You never expect that the check you've accepted as payment for the goods or services you've provided will bounce or that you'll have a chargeback for a credit card payment, but unfortunately these are common occurrences (especially in tough economic times). No matter how careful you are, you may get stiffed! If, in the course of your business, you lend money or extend credit for your goods and services but fail to receive payment, you can take some comfort in the tax treatment for these transactions gone sour. You may be able to deduct your loss as a bad debt.

For further information about deducting bad debts, see IRS Publication 535, Business Expenses.

Bad Debts in General

If you cannot collect money that is owed to you in your business, your loss may be deductible. You must prove 3 factors to establish a bad debt:

  1. The debtor-creditor relationship
  2. Worthlessness
  3. Loss

The Debtor-Creditor Relationship

You must prove that there is a debtor-creditor relationship. This means that there is a legal obligation ...

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