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Lane
Lane, JD, CFP, MBA, CRPS
Category: Tax
Satisfied Customers: 10100
Experience:  Law Degree, specialization in Tax Law and Corporate Law, CFP and MBA, Providing Financial & Tax advice since 1986
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Have a uncollectable judgement, can I right it off on my

Customer Question

Have a uncollectable judgement, can I right it off on my taxes?
Submitted: 1 year ago.
Category: Tax
Expert:  Lane replied 1 year ago.

Hi,

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Yes, this is deductible, either as a business bad debt, or a non-business bad debt ... depending on whether you are in the business of lending

Expert:  Lane replied 1 year ago.

From IRS:

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A business deducts its bad debts from gross income when figuring its taxable income. You can deduct business bad debts in part or in full. You can claim a business bad debt using either the specific charge-off method or the nonaccrual-experience method.

All other bad debts are nonbusiness. Nonbusiness bad debts must be totally worthless to be deductible. You cannot deduct a partially worthless nonbusiness bad debt.

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 that it is worthless.

Expert:  Lane replied 1 year ago.

Finally, again, "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" (pertinent part underlined)

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SO, you're VERY well PAST what you need to do to show you tried to collect.

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Report a non-business bad debt as a short-term capital loss on Form 8949 (PDF), Sales and Other Dispositions of Capital Assets, Part 1, line 1. Enter the name of the debtor and "bad debt statement attached" in column (a). Enter your basis in the bad debt in column (e) and enter zero in column (d). Use a separate line for each bad debt. It is subject to the capital loss limitations. A nonbusiness bad debt deduction requires a separate detailed statement attached to your return.

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Generally, a business bad debt is one that comes from operating your trade or business. You can deduct it on your business income tax return.

The following are examples of business bad debts (if previously included in income):

  • 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. You can deduct business bad debts in part or in full. You can claim a business bad debt using either the specific charge-off method or the nonaccrual-experience method.

Expert:  Lane replied 1 year ago.

Hope this helps

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Lane

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If this HAS helped, and you don't have additional questions on this, I'd appreciate a positive rating (by clicking the stars or smiley faces on your screen) ... that's the only way I'll be credited for the work here.
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