The following are examples of business bad debts (if previously included in income): You can deduct it on Schedule C (Form 1040), Profit or Loss From Business (Sole Proprietorship) or on your applicable business income tax return. A debt is closely related to your trade or business if your primary motive for incurring the debt is business related. There are two kinds of bad debts – business and nonbusiness.īusiness Bad Debts - Generally, a business bad debt is a loss from the worthlessness of a debt that was either created or acquired in a trade or business or closely related to your trade or business when it became partly to totally worthless. If you lend money to a relative or friend with the understanding the relative or friend may not repay it, you must consider it as a gift and not as a loan, and you may not deduct it as a bad debt. For a bad debt, you must show that at the time of the transaction you intended to make a loan and not a gift. If you're a cash method taxpayer (most individuals are), you generally can't take a bad debt deduction for unpaid salaries, wages, rents, fees, interests, dividends, and similar items. Generally, to deduct a bad debt, you must have previously included the amount in your income or loaned out your cash. For a discussion of what constitutes a valid debt, refer to Publication 550, Investment Income and Expenses and Publication 535, Business Expenses. If someone owes you money that you can't collect, you may have a bad debt.
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