what steps have you taken to recover amounts paid in excess of work performed?
if the contractor was boned, did you file a claim against the bonding company?
have you filed suit in small claims court or if above small claims for your state or have you engaged an attorney to file suit against the contractor?
in short, to sustain a loss for income tax purposes, the IRS, if it inquires, will want to know what steps you've taken to recover the losses. if you don't do enough the iRS can deny the deduction for any loss. until such ytime as recovery seems unlikely all you have is a contingent loss which is not deductible.
an example of this: you have auto insurance and are in an accident where your insurance company will be paying. However, rather than file a claim with them you decide not to file a claim. The IRS will not allow you to write off your loss in excess of any deductible if it's a business loss.
