Hello! I am a CPA here to assist you with your tax questions. My goal is to provide you with excellent service today.
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Are you a cash or accrual basis taxpayer?
If you are a cash basis taxpayer (which most independent contractors are) then you cannot deduct the debt on your tax return. This is because you never claimed as income the amount that they owed to you.
Unfortunately, you cannot deduct the bad debt because you never included the amount as income. Therefore, you cannot deduct it.
I'm truly sorry. Please don't shoot the messenger!
How bad debt deductions typically work is that in one year an accrual basis taxpayer will recognize income because they rendered service. They will pay tax on that income. Then, they don't get paid and then they can, in the year the debt becomes uncollectible, deduct that from their income because they included it prior
I wish I had better news.
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Per the IRS, "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." You can CLICK HERE to verify on tax topic 453
http://www.irs.gov/publications/p535/ch10.html specific charge off method
If you use the specific charge-off method, you can deduct specific business bad debts that become either partly or totally worthless during the tax year. However, with respect to partly worthless bad debts, your deduction is limited to the amount you charged off on your books during the year.
Yes, on that same link you just gave me it reads "Cash method. If you use the cash method of accounting, you generally report income when you receive payment. You cannot claim a bad debt deduction for amounts owed to you because you never included those amounts in income. For example, a cash basis architect cannot claim a bad debt deduction if a client fails to pay the bill because the architect's fee was never included in income."
Well, ok. I think I'll swallow this ugly reality now. Ouch. thanks for your time. i wont use up anymore of it
I'm truly sorry there wasn't better news
thanks, XXXXX XXXXX :-)