Small Business Tax Deduction - Write-Off Bad Debts

 


Visitors: 948

Practically every small business has receivables that it cannot obtain from clients. If your small business doesn't have any such receivables, consider yourself lucky. For those small businesses that suffer from uncollected receivables, solace can be taken from the fact you can claim a tax deduction.

Bad Debt Tax Deduction

A small business can write-off bad debt losses if it meets nominal requirements. To claim such a tax deduction, the following must be shown:

A. The existence of a legal relationship between the small business and debtor;

B. The receivables are worthless; and

C. The small business suffered an actual loss.

Proving there is a legal relationship between the small business and debtor is fairly simple. You must simply show that the debtor has a legal obligation to make a payment. Most businesses issue invoices or sign contracts with debtors and these documents suffice to prove the legal relationship. If you are not putting your business relationships in writing, you should begin doing so immediately.

Proving receivables are worthless is slightly more complex. A small business is required to show that the debt has become both worthless and will remain so. You must also show that you took reasonable steps to collect the receivables, but you are not necessarily required to go to court to meet this requirement. A clear example where you would meet this requirement is if the debtor filed bankruptcy.

While proving that you suffered a loss may sound like the easiest requirement to meet, the issue is a bit more complicated. The Tax Code defines the loss as an amount that is included in your books as income, but is never collected. A classic example of such a situation would be a manufacturer that provides products to retailers on credit. The manufacturer can show a real loss if the retailer files bankruptcy. Unfortunately, there is almost no way to claim a loss if you provide hourly services and use a cash accounting method. The IRS does not consider the expenditure of time and effort to be a sustained economic loss.

Small businesses suffer all to often from uncollected receivables. If you failed to claim such losses as a tax deduction during your last three tax filing years, you should file amended tax returns to get a refund.

Richard A. Chapo is with http://www.businesstaxrecovery.com - recovery of business taxes through tax help and tax relief. Visit http://www.businesstaxrecovery.com/articles to read more business tax articles.

(435)

Article Source:


 
Rate this Article: 
 
What Is An LLC Tax Deduction?
Rated 4 / 5
based on 5 votes
ArticleSlash

Related Articles:

Overview of the Almighty Tax Deduction for Small Businesses

by: Richard Chapo (July 23, 2006) 
(Finance/Taxes)

Small Business Tax Write Offs

by: Michael Baker (March 31, 2007) 
(Finance)

How Can I Claim A Home Business Tax Deduction?

by: Mike Singh (September 01, 2006) 
(Finance/Taxes)

Tax Relief - For Bad Debts

by: Noreen Centeno (April 23, 2008) 
(Finance/Taxes Relief)

Eliminate Small Business Debts - How to Locate Top Debt Relief Services For ..

by: Matt Couch (November 28, 2009) 
(Finance/Debt Management)

Free Tax Deduction Maximizer Turbo Charges Tax Deductions Online

by: FrankW Ellis (January 02, 2007) 
(Finance)

Eliminate Small Business Debts - How to Locate Debt Relief For Small Business

by: Matt Couch (December 25, 2009) 
(Finance/Debt Management)

Tax Reform - Limit of Mortgage Tax Deduction

by: Sergio Haros (October 27, 2005) 
(Finance/Taxes)

Small Business Tax Filing - Forms You Need to Avoid an IRS Tax Debt

by: Richard Close (March 17, 2008) 
(Finance/Taxes Income)

What Is An LLC Tax Deduction?

by: Mike Singh (September 08, 2006) 
(Finance)