Claiming A Bad Debt ON YOUR OWN Tax Return

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Is your debt Eligible for Write Off? A deductible bad debts must be considered a result of either actual money loaned or of the reduction on previously reported income. Is This a Business or Personal Bad Debt? To regulate how to create off a bad debt on your tax return, you must determine whether the debt is a business bad debt or an individual bad debt. Business bad debt is a debts created within the ordinary course of business or as something that was closely related to the business enterprise.

For example, it is a small business bad debts if a customer does not pay their invoice if you are on the accrual basis of accounting. A good example of a bad personal debt related to the business would be if the business enterprise carefully, or one of the owners of the carrying on business, loaned a amount of cash to a supplier who later didn’t repay the loan. Business debt are considered a business expense and are deducted on the business enterprise tax return in the year it becomes worthless. If the debt had no link with business purpose or activity, it would be considered an individual bad personal debt then.

Usually this is because making a loan to a friend or relative who fails to repay the loan. 1500.00 for wedded filing individually) in deductible capital loss. Personal bad debts must be carefully noted and this is particularly important if the bad debt was to a member of family. Under audit, the IRS will ask for a duplicate of the promissory notice or other proof that the loan was really a loan and not intended to be considered a present. For both personal and business bad debts, but again specifically for personal bad debts (and add emphasis to that if the loan is to a relative), it is very important to have careful documents on your time and efforts to collect your debt.

Normally this includes copies of demand words and other collection correspondence. It would also include the ongoing services of an lawyer or filing a collection lawsuit. If no effort is made by you to collect a personal bad debt, then generally you might not write it off the bad debt on your tax return. The debt must be written off in the entire year it becomes worthless. It might not be written off in later years. However, year if a business debt becomes partially worthless in a single, then under most circumstances the partial amount can be written off in that year and the rest written off as it becomes worthless.

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In general, personal bad debt might not be written off. Consult with your tax accountant if you have a partially worthless personal bad debt. Sometimes, it is hard to determine when a debt becomes worthless, and it is only in a later year that you realize that the debt has become uncollectible.

In this case, you would be required to file an amended go back to write from the bad debt on the taxes return for the year that the debt became worthless. Use Publication 550 for information on personal bad debt. Use Publication 535 to find out more on business bad personal debt. This short article is not designed to be specific taxes advice. It really is intended as an over-all guide only. Any specific advice should be searched for from your tax professional.

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