What is Considered “Bad Debt” and How Do I Claim It for My Business?
Credit enables many customer transactions that would not otherwise be possible. If your business offers customer credit, you’ve most likely had someone unable to repay their debt. If you report these sales as income but cannot collect, the IRS calls this “business bad debt.” In these cases, the IRS allows you to deduct those debts to decrease your federal tax liability. These frequently asked questions will help you understand how to proceed if this happens to your business.
When is a business debt considered “bad”?
There are two kinds of bad debts — business and personal. Business “bad debt” is a loss from an uncollectible loan. These loans can be from clients or suppliers, previous partners, or political parties.
Depending on your accounting practices, credit sales for goods or services that have not been paid in a reasonable period of time may be considered bad debt. If your business uses a cash accounting method, you only report the income once you receive it; therefore, you cannot claim a bad debt because you did not yet count the sale as income. If your business uses accrual accounting, you may have already included the sale as income. In that case, the sales would be classified as bad debts and are subject to deductions.
Not only do some credit sales lead to bad debt, but also debts from a former business, debt acquired from a decedent, and liquidation of a business. If you retained your receivables from a previous business, but then you were unable to collect, those can be considered bad debt. This is the same if you liquidate your business and you do not collect on all of the accounts receivable.
For the rest of the article by Jim D of Business.gov, please go to http://bit.ly/cmqrtG
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