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logicnine
Returning Member

Bad debt deduction

My business MADE $295,000 in profit this year.

If everyone would have paid their bills it would have been well over $500,000

When doing my taxes, is my 'taxable income' even income that is bad debt?

Then I just deduct the bad debt under the appropriate section?

 

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7 Replies

Bad debt deduction

It might not be a bad debt.  That is if you made an investment or loaned someone the money.  And you can only deduct 3,000 per year.

 

You have lost income.  No.  Not unless you already included it as income first.  You can't deduct income you never received.  You will just have less income to be taxed on.  You take the loss by still deducting all your actual expenses.

Anonymous
Not applicable

Bad debt deduction

most likely yo are a cash basis taxpayer.  you report income when received not when earned and you take deductions when paid and not when incurred.    as such you have not included in income any uncollected amounts  therefore don't pay taxes on it.          an accrual basis taxpayer would include the uncollected amount in income and then take a bad debt deduction for amount deemed uncollectible .  any amount of the uncollected amount would not be eligible for a bad debt deduction and thus included in income in the year earned.  .    put another way for accrual basis taxapayer  say  $200,000  uncollected at the end of 2018.   $70,000 uncollectible.   the $200,000 would be included in gross revenue and a bad debt deduction of $70,000  leaving the taxpayer with $130,000 more in income than cash basis taxpayer and having to pay taxes on it in 2018 rather than the year collected.        

Carl
Level 15

Bad debt deduction

Assuming your business uses the cash method of accounting, you have no loss to claim. You flat out can not deduct from  your taxable income, that which you never received and therefore did not pay taxes on in the first place. So while you may have "bad debt", not a penny of it is deductible since you never paid taxes on that money in the first place.

If you "really" have that much in unpaid invoices outstanding, I would highly suggest you look at small claims court. I use it when necessary in my business to collect unpaid bills. The filing fee for a claim in my county is $120 and I automatically add that amount to the debt owed as a "finance charge". Do take note however to first check court records (which are public information) to see if the debtor has filed and completed a bankruptcy proceeding that was initiated "AFTER" the debt was due. If they've filed bankruptcy then there's no sense in taking them to small claims court.

The first time I took a client to small claims court, I was shocked at how simple, easy and timely it was. Didn't even have to hire a lawyer or anything.

logicnine
Returning Member

Bad debt deduction

I "really" have that much  bad debt. We provide software as a service and therefore people just choose to stop paying.


Even for small claims court, you have to physically GO THERE. Many states do not allow lawyers in small claims. So for me to fly around the country 20x a year and sue someone and likely never collect anyways is pointless.

Bad debt deduction

Sorry but you cannot deduct the bad debt unless you make all possible efforts to collect it ... if you are a cash basis business ( and if you are not sure you really need to seek local professional help to get educated) then you simply have less income to report but no deduction.   What you can deduct is the cost of the hardware for the job and the cost of any employee wages associated with this matter.  

TomD8
Level 15

Bad debt deduction

It all comes down to this:  you can’t deduct a bad debt on a tax return unless you previously reported the income on an earlier return.

 

 

**Answers are correct to the best of my ability but do not constitute tax or legal advice.
tax9025
New Member

Bad debt deduction

How do I file a claim for bad debt deductions on judgments that have been uncollectible? These were associated with Real Estate Rentals in my profession .    in years past this was done on Schedule D, but now seems to require Form 8949, for 2017 tax year.

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