Small Business Tax Deduction – Write-Off Bad Debts

Expert Comptable Angers FiscaliteSmall Business Tax Deduction – Write-Off Bad Debts: 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. Solace can be taken from the fact you can claim a tax deduction when small businesses suffer from uncollected receivables.

Write-Off Bad Debts For Small Businesses

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.

LEt’s get down to business

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 of 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, according to point fort point faible entretien . 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.

Bad Debt Tax Deduction

Small businesses suffer all too often from uncollected receivables. If you failed to claim such losses as a tax deduction during your last three tax filing years, then you should file amended tax returns to get a refund. Small Business Tax Deduction – Write-Off Bad Debts.

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