Bad Debt Deductions and Debt Write Offs

Author: Jennifer Kowal

Per the IRS Education Provider Standards this course must be COMPLETED by 12/31/2026 to receive credits

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

Designed For
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Topics Covered

• 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

Learning Objectives

• 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

Level
Intermediate

Instructional Method
Self-Study

NASBA Field of Study
Taxes (2 hours)

Program Prerequisites
Basic understanding of debt deductions and debt write-offs.

Advance Preparation
None