Bad Debt Deductions and Debt Write Offs
Author: Jennifer Kowal
||2 hours for CPAs
2 hours Federal Tax Related for EAs and OTRPs
2 hours Federal Tax Law for CTEC
With the looming economic recession, understanding the rules for claiming tax deductions for bad debts is more important than ever. In an economic downturn, the possibility increases that taxpayers won’t be fully paid for trade receivables and other debt instruments.
In order to reduce the financial hit from bad debts, it is important to understand the tax provisions applicable to partially worthless, wholly worthless, secured and non-business bad debts. What is considered a bad debt to a business person may not necessarily represent a bad debt for tax purposes.
Publication Date: April 2023
- Definition of Debt and Basic Distinctions from Equity
- Debt Workouts Resulting in Bad Debt Deduction
- Rules for Deducting Business Bad Debts v. Nonbusiness Bad Debts
- Wholly worthless debts v. Partially Worthless Debts
- Documentation of Worthlessness
- Difference in Rules for Cash and Accrual Method Taxpayers
- Describe a bona fide debt deductible as bad debt for tax purposes
- Identify tax consequences of related party bad debts
- Recognize how to differentiate between business bad debts and nonbusiness bad debts
- Describe factors that prove worthlessness of debt
- Recognize how to evaluate the best timing for claiming a bad debt
NASBA Field of Study
Taxes (2 hours)
Basic understanding of debt deductions and debt write-offs.