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What is a business bad debt and how do I claim it using TurboTax Live Assisted Business?

by TurboTax•2• Updated 4 months ago

If your business provides goods or services on credit, you may encounter uncollectible amounts, which may be a deductible bad debt for income tax. 

A bad debt occurs when you are owed money that cannot be collected. 

Business bad debts are mainly the result of nonpayment of part or all of a credit sale to a customer, or also a loan to a vendor, client, employee, or distributor. If you use an accrual method of accounting, you normally report income as you earn it. 

A business bad debt is deductible if the amount is included in your gross income for the year the deduction is claimed, or was included in a prior year.

If however, you use the cash method of accounting, you normally report income when you receive payment. You can't take a bad debt deduction for amounts owed to you that you have never included in business income.

 All other bad debts are nonbusiness bad debts. Nonbusiness bad debts must be totally worthless to the deductible. Nothing can be deducted if any portion of a bad debt is recoverable.  Nonbusiness bad debts are deductible as short-term capital losses on Form 8949 and Schedule C (Form 1040). 

For more information, see IRS Topic no. 453, Bad debt deduction.

  1. Select Deductions from the left menu.
  2. On the Your Deductions screen, under Business Expenses, beside Bad debts, select Start.
    1. On the Enter Any Bad Debt Expense screen, beside Bad Debts, enter the bad debt amount, and select Continue.
  3. On the Your Deductions screen, under Business Expenses, beside Bad debts, the amount you entered as a bed debt now appears next to the Start button.