Think Outside the Tax Box
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Think Outside the Tax Box
When Debts Go Bad - 06-01-26
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It is painful when you finally realize that the money you expected to be repaid is never coming back. The tiny silver lining in that cloud might be the tax benefit of “writing off” the debt. Unfortunately, that silver lining may well be eclipsed by an even bigger cloud. Writing bad debt off is not that easy, and there’s probably no silver lining to that cloud. Ironically, you might find that the mistakes that caused you to be holding a bad debt might be what prevents you from getting a usable deduction.
What Is Involved?
You may be allowed a deduction for any debt that becomes worthless within the taxable year. You might also be allowed a deduction for partial worthlessness. If the bad debt you are writing off is not a business bad debt, then the loss is treated as a short-term capital loss.
What you need to establish for the deduction is that there actually was a debt, when it became worthless or partially worthless, and whether it is business or nonbusiness. In this episode we discuss some recent cases that go over these issues.
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