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Hi and welcome to Just Answer!If someone owes you money that you cannot collect, you may have a bad debt.To deduct a bad debt, you must have previously included the amount in your income or loaned out your cash.For a bad debt, you must show that there was an intention at the time of the transaction to make a loan and not for other purposes.
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. It is subject to the capital loss limitations. A nonbusiness bad debt deduction requires a separate detailed statement attached to your return. Business bad debts may be deducted in part or in full.For Business Bad Debt - see IRS publication 535 chapter 10 - www.irs.gov/pub/irs-pdf/p535.pdf
There are two methods to claim a business bad debt.
-- The specific charge-off method.
-- The nonaccrual-experience method.
Generally, you must use the specific charge-off method. However, you may use the nonaccrual-experience method if you meet the requirements
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