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In 2011, I provided professional services to a company who

paid me as independent contractor...
In 2011, I provided professional services to a company who paid me as independent contractor.
In 2012, I continued working with the company, but they stopped paying their bills. I made many demands for payment but patiently waited while they tried to come up with the money.
In 2013, the company filed for bankruptcy while owing me a debt of over $150,000 for professional services.
I want to charge off the business debt on my tax return. My question is, can I go back and amend my 2011 tax return and tax the charge off then? Could I take the charge off in 2012? Or do I have to wait to use the charge off on a go-forward basis onfuture returns?
I really want to take the charge off in 2011. It's when I had my greatest tax liability, and I would get some money back if I was able to use it then.
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Answered in 7 minutes by:
9/23/2013
Megan C
Megan C, Certified Public Accountant (CPA)
Category: Tax
Satisfied Customers: 16,581
Experience: Licensed CPA, CFE, CMA, CGMA who teaches accounting courses at Master's Level
Verified

Megan C :

Hello! I am a CPA here to assist you with your tax questions. My goal is to provide you with excellent service today.

Megan C :

How are you today?

Megan C :

Are you a cash or accrual basis taxpayer?

Customer: Cash. I was hoping to use the specific charge off method
Customer: .
Megan C :

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.

Megan C :

Unfortunately, you cannot deduct the bad debt because you never included the amount as income. Therefore, you cannot deduct it.

Megan C :

I'm truly sorry. Please don't shoot the messenger!

Customer: Haha.
Megan C :

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

Customer: I thank you for your time.
Megan C :

I wish I had better news.

Megan C :

If you would, please take a moment to rate my response as "excellent" so that I may receive credit for assisting you today.

Customer: I realize what you are saying. I was reading the IRS rules and it seemed to indicated that a professional could use the specific charge off method, even if cash based accounting.
Customer: There were only two requirements, which I fulfilled. I just wanted to know of I could go backward with it.
Megan C :

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

Customer:

http://www.irs.gov/publications/p535/ch10.html specific charge off method

Customer:

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.

Megan C :

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."

Customer:

Well, ok. I think I'll swallow this ugly reality now. Ouch. thanks for your time. i wont use up anymore of it

Megan C :

I'm truly sorry there wasn't better news

Customer:

thanks, XXXXX XXXXX :-)

Megan C
Megan C, Certified Public Accountant (CPA)
Category: Tax
Satisfied Customers: 16,581
Experience: Licensed CPA, CFE, CMA, CGMA who teaches accounting courses at Master's Level
Verified
Megan C and 87 other Tax Specialists are ready to help you
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Thanks so much for your positive rating. I'm truly sorry that the tax code was not written in your favor in this regard. Please let me know if I can be of any additional assistance to you. It was a pleasure working with you today. Come back and see me any time you have a tax, finance, or social security question.

In the future you may receive a short survey. Your positive feedback on this survey would be greatly appreciated, as it will assist me with rankings on the site. Thanks again for being a valued JustAnswer.com customer.
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Customer reply replied 4 years ago
I had a follow up question relating to our topic yesterday. Is there any creative way to use the loss on my tax return? Advertising cost for example? I could say that I worked those times and didn't get paid as advertising (personal networking) costs at a value of my monthy time spent in service.

Would that be something I could make a reasonable argument for?

And yes, I'll certainly answer the survey! :-)
Thank you for your follow up.

Unfortunately, there's no way to take this loss to the tax return, creative or not. The matter remains that no taxable income was generated, therefore no expense can be taken.

You cannot deduct the fair market value of your time as an expense, either. That's a common question, and one I typically hear when someone is trying to get a charitable deduction.

If there was a way to take this loss, I would be thrilled to tell you. Unfortunately, there is not. I'm sorry.

Please let me know if you need anything additional. If not, please rate as "excellent" so that I may receive credit for assisting you today. Thanks again.
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Megan C
Megan C
Megan C, Certified Public Accountant (CPA)
Category: Tax
Satisfied Customers: 16,581
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Experience: Licensed CPA, CFE, CMA, CGMA who teaches accounting courses at Master's Level

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