Business Bad Debt Deduction


S

SteveW

Our company has some advances to (former) employees
receivables that we feel are not collectable. What kind of
documentation will we need to deduct these items? Im
thinking we will have to have a signed evidence of the debt,
and documentation of our attempt to collect them. Is there
any other things I might need?

Thanks

Steve

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D

Dick Adams

<< General Disclaimer: >>
<< The foregoing is intended for educational purposes only >>
<< and does NOT constitute legal OR professional advice. >>
<< It cannot be used by any taxpayer for the purpose of >>
<< avoiding penalties that may be imposed on the taxpayer. >>
<< ======================================================= >>

SteveW said:
Our company has some advances to (former) employees
receivables that we feel are not collectable. What kind of
documentation will we need to deduct these items? Im
thinking we will have to have a signed evidence of the debt,
and documentation of our attempt to collect them. Is there
any other things I might need?
Write them off by issuing these employees 1099's.

<< ------------------------------------------------->>
<< The Charter and the Guidelines for submitting >>
<< messages to this newsgroup are at www.asktax.org >>
<< Copyright (2005) - All rights reserved >>
<< ------------------------------------------------->>
 
R

R

<< General Disclaimer: >>
<< The foregoing is intended for educational purposes only >>
<< and does NOT constitute legal OR professional advice. >>
<< It cannot be used by any taxpayer for the purpose of >>
<< avoiding penalties that may be imposed on the taxpayer. >>
<< ======================================================= >>

SteveW said:
Our company has some advances to (former) employees
receivables that we feel are not collectable. What kind of
documentation will we need to deduct these items? Im
thinking we will have to have a signed evidence of the debt,
and documentation of our attempt to collect them. Is there
any other things I might need?
To be deductible as Bad Debt Expense, the IRS requires that
you make a substantial effort to collect the debt before
it's written off, such as turning the debt over to a
collection agency or suing the debtor. This reasoning is
unstandable because if it was as easy as making a journal
entry, then everyone would be giving money to friends and
family, then writing it off as bad debt.

Hope this helps,
Russell Tuncap, CMA, CPA
www.tuncap.com

<< ------------------------------------------------->>
<< The Charter and the Guidelines for submitting >>
<< messages to this newsgroup are at www.asktax.org >>
<< Copyright (2005) - All rights reserved >>
<< ------------------------------------------------->>
 
S

Stuart A. Bronstein

R said:
To be deductible as Bad Debt Expense, the IRS requires that
you make a substantial effort to collect the debt before
it's written off, such as turning the debt over to a
collection agency or suing the debtor. This reasoning is
unstandable because if it was as easy as making a journal
entry, then everyone would be giving money to friends and
family, then writing it off as bad debt.
So bad debts based on personal loans are deductible?

Stu
 
Last edited by a moderator:
D

Dick Adams

So bad debts based on personal loans are deductible?
Sounded to me as loans or advances to employees. Employee
left without repaying? To repeat myself, issue a 1099. The
employer gets to write it off in whole and the erstwhile
employee gets to pay the taxes on it.
 
H

Herb Smith

So bad debts based on personal loans are deductible?
Yes, they are. NON-BUSINESS Bad Debts are claimed as
short-term capital losses on your Schedule D. Of course, you
still have to have evidence that a valid debt existed
(signed promissory note with repayment detail) and efforts
to collect the debt - including suing in small claims court.
Issuing a 1099 to the debtor is not usually an option for a
non-business bad debt, but is perfectly acceptable for a
business. If they won't pay back the loan, make 'em hurt a
little by having to pay the taxes on that "income"!
 
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M

MTW

Stuart said:
So bad debts based on personal loans are deductible?
Yes. It would appear to be an exception to the general
concept that "personal" expenses are not deductible.
Naturally, write-offs based on loans to friends or family
members might be closely scrutinized to see if "gift"
motives were involved, etc.

MTW
 
H

Harlan Lunsford

So bad debts based on personal loans are deductible?
I'm thinking that loans to employees, being in a business
setting would not be personal in nature, esp if employer
were other than a proprietorship.

ChEAr$,
Harlan Lunsford, EA n LA
 
S

Stuart A. Bronstein

Harlan Lunsford said:
Stuart A. Bronstein wrote:
I'm thinking that loans to employees, being in a business
setting would not be personal in nature, esp if employer
were other than a proprietorship.
That makes lots of sense to me.

But seeing that's true, it must be wrong. ;-)

Stu
 
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S

Stuart A. Bronstein

Herb Smith said:
Yes, they are. NON-BUSINESS Bad Debts are claimed as
short-term capital losses on your Schedule D. Of course, you
still have to have evidence that a valid debt existed
(signed promissory note with repayment detail) and efforts
to collect the debt - including suing in small claims court.
Issuing a 1099 to the debtor is not usually an option for a
non-business bad debt, but is perfectly acceptable for a
business. If they won't pay back the loan, make 'em hurt a
little by having to pay the taxes on that "income"!
Even the IRS has done that. I remember seeing one case in
which the IRS blew the statute of limitation in an attempt
to collect a rather large tax bill. So for the year in
which the statute expired, they determined that the amount
of unpaid tax was taxable income. So they got a good chunk
of it anyway.

Stu
 

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