Home improvement contractor took payment and was then incarcerated and never did any work. can i claim this as a bad debt? what forms and where in tax return?

[JohnW222 · Accepted solution]

This isn’t considered a bad debt – a bad debt involves a loan that hasn’t been repaid.

The scenario you describe amounts to theft and, unfortunately, you can no longer deduct such a loss.  The deduction for personal casualty or theft losses has been suspended (eliminated) through tax year 2025, unless the loss occurred in a federally-declared disaster area and was directly caused by the disaster.

Please see the TurboTax Help article "What if I have property that was lost or damaged (a casualty loss)?" for more information.

[OY1]

From publication 550 in irsgov website , is a similar example
Mechanics' and suppliers' liens.

Workers and material suppliers may file liens against property because of debts owed by a builder or contractor. If you pay off the lien to avoid foreclosure and loss of your property, you are entitled to repayment from the builder or contractor. If the debt is uncollectible, you can take a bad debt deduction.

Insolvency of contractor.

You can take a bad debt deduction for the amount you deposit with a contractor if the contractor becomes insolvent and you are unable to recover your deposit. If the deposit is for work unrelated to your trade or business, it is a nonbusiness bad debt deduction.

[DianeW777]

Incarceration is not the same as being insolvent.  Insolvency would have to be the reason to be able to utilize the nonbusiness bad debt.  If you discover this is the case from the contractor then you could use that action on your tax return.  You must have sufficient records to prove your case. Examples would be proof of a bankruptcy by the contractor or other proof the contractor might have for insolvency.

As our awesome Tax Expert @JohnW222 indicated a casualty loss is what has taken place and there is no deduction (suspended) at this time when a trade or business is not involved as is you situation.

@kknox7975