Write-Off Bad Business Debts On Your Taxes
Below is a MRR and PLR article in category Finance -> subcategory Taxes.
Write Off Bad Business Debts on Your Taxes
Overview
Nearly every small business faces the challenge of uncollected receivables from clients. However, the silver lining is that you can claim a tax deduction for these bad debts.
Understanding Bad Debt Tax Deductions
Small businesses can write off bad debt losses if they meet certain requirements. Here’s what you need to prove to claim this deduction:
1. Legal Relationship: There must be a formal agreement between your business and the debtor, indicating an obligation to pay. This is typically proven through invoices or contracts. If you’re not documenting these relationships, start doing so promptly.
2. Worthless Receivables: You must demonstrate that the debts are irrecoverable and remain so. This involves showing that reasonable efforts to collect the debts have been made, though pursuing the matter in court isn't necessary. A clear case would be if the debtor has declared bankruptcy.
3. Actual Loss: This involves proving that an amount recorded as income was never actually collected. For example, if a manufacturer sells goods on credit to a retailer who later declares bankruptcy, the loss is evident.
Unfortunately, if you offer hourly services and follow a cash accounting method, claiming a loss is almost impossible. The IRS doesn't view time and effort alone as a tangible economic loss.
Taking Action
Small businesses often struggle with uncollected receivables. If you’ve missed claiming these losses for the past three tax years, consider filing amended returns to potentially receive a refund.
You can find the original non-AI version of this article here: Write-Off Bad Business Debts On Your Taxes.
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