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I just asked this same question to justanswer.com, but it was a lawyer who answered. He said I should also check with a CPA. My question was this:

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I'm a licensed Marriage & Family Therapist in the State of California. I'm a sole practitioner with a private practice. I've been reading up about deductions and bad debts.I often cannot collect for no show or late cancelled appointments, (i.e., insurance will not pay). I also occasionally have private pay clients who book their first appointment then never show up. I am again out the time and money. Lastly, I have a long-term client who originally used her insurance benefits, then filed for bankruptcy so I only charged her $20.00 per session, and now she cannot afford to pay anything for my services. I am essentially seeing her pro bono hoping her financial situation might change. Is this also a bad debt that I can write off? I'm so sorry...that sent while I was still typing...but I'm hoping it still makes sense!

Accountant's Assistant: Is there anything else the Accountant should be aware of?

No. I just hope the prematurely sent message makes sense. The main question is what constitutes bad debt that can be written off my net profits.

Submitted: 11 months ago.Category: Finance
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Answered in 26 minutes by:
10/1/2017
Financial Professional: Tax.appeal.168, Accountant replied 11 months ago
Tax.appeal.168
Tax.appeal.168, Accountant
Category: Finance
Satisfied Customers: 4,871
Experience: Tax Accountant
Verified

Hello. Thank you for choosing this Q&A service for assistance. My name is Angela. I will be assisting you.

In brief, money owed for no shows or pro bono services is not considered bad debt in the eyes of the IRS. SEE BELOW:

-----------------------

There are three requirements that must be satisfied to deduct a bad business debt. You must be able to show that:

  • the debt is a bona fide business debt
  • it is a worthless debt, and
  • you suffered an economic loss.

--------------------------------------

An Economic Loss

You are not automatically entitled to deduct a debt because the obligation has become worthless. To get a deduction, you must have suffered an economic loss. According to the IRS, you have a loss only when:

  • you have already reported the money owed as business income
  • you paid out cash, or
  • you made credit sales of inventory that were not paid for.

Unfortunately, if, like most self-employed people, you’re a cash basis taxpayer who sells services to your clients, you don’t report income until you actually receive it. As a result, you don’t have an economic loss (in the eyes of the IRS) when a client fails to pay. Thus, you can’t claim a bad debt deduction if a client fails to pay you.

REFERENCE SOURCE:

https://www.nolo.com/legal-encyclopedia/why-most-self-employed-service-providers-cant-deduct-bad-business-debts.html

Business bad debts are defined as follows:

Business Bad Debts - Generally, a business bad debt is a loss from the worthlessness of a debt that was either created or acquired in a trade or business or closely related to your trade or business when it became partly to totally worthless. You can deduct it on Form 1040, Schedule C (PDF), Profit or Loss from Business (Sole Proprietorship), or on your applicable 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

REFERENCE SOURCE:

https://www.irs.gov/taxtopics/tc450/tc453

If the above information clarifies matters for you, I ask that you please take the time to scroll to the top of the page and select 3 or more stars to positively rate my response so that I can receive credit for assisting you. A 5 star rating is greatly appreciated. Thank you in advance.

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