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These are deductible as business bad debts since they are payments made on behalf of a business from whom there is no hope of recovery. Here is a short piece from the IRS concerning this. You can read more, should you so chose, at the IRS web site www.irs.gov
Topic 453 - Bad Debt
If someone owes you money that you cannot collect, you may have a bad debt.
For a discussion of what constitutes a valid debt, refer to Publication 550, Investment Income
and Expenses, and Publication
535, Business Expense.
To deduct a bad debt, you must have previously included the amount in
your income or loaned out your cash. If you are a cash basis taxpayer, you may
not take a bad debt deduction for money you expected to receive but did not (for
example, for money owed to you for services performed, or rent) because that
amount was never included in your income. For a bad debt, you must show that
there was an intention at the time of the transaction to make a loan and not a
gift. If you lend money to a relative or friend with the understanding that it
may not be repaid, it is considered a gift and not a loan.
There are two kinds of bad debts - business and nonbusiness.
Generally, a business bad debt is one that comes from operating your trade or
The following are examples of business bad debts (if previously included in
- Loans to clients and suppliers
- Credit sales to customers, or
- Business loan guarantees
A business deducts its bad debts from gross income when figuring its taxable
income. Business bad debts may be deducted in part or in full. You can claim a
business bad debt using either the specific charge-off method or the
All other bad debts are nonbusiness. Nonbusiness bad debts must be totally
worthless to be deductible. You cannot deduct a partially worthless nonbusiness
A debt becomes worthless when the surrounding facts and circumstances
indicate there is no reasonable expectation of payment. To show that a debt is
worthless, you must establish that you have taken reasonable steps to collect
the debt. It is not necessary to go to court if you can show that a judgment
from the court would be uncollectible. You may take the deduction only in the
year the debt becomes worthless. You do not have to wait until a debt is due to
determine whether it is worthless.
A nonbusiness bad debt is reported as a short-term capital loss in Part 1 on
Form 1040, Schedule D (PDF). It is
subject to the capital loss limitations. A nonbusiness bad debt deduction
requires a separate detailed statement attached to your return.
For more information on nonbusiness bad debts, refer to Publication 550, Investment Income
and Expenses. For more information on business bad debts, refer to Publication 535, Business