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I have a client who has a legal judgement against a

I have a client...

I have a client who has a legal judgement against a contractor who was doing remodel work on the house. Long story short, the judgement is $111,0000. Their out of pocket was much higher to have things redone correctly. The contractor has filed bankruptcy both with the business and personally. Judge declared him liable and pierced the LLC. Would you take this as a non business bad debt? Their legal judgement and his bankruptcy were all in 2017.

Accountant's Assistant: The Accountant will know how to help. Is there anything else important you think the Accountant should know?

Additionally they have $6000 in legal fees pursuing this case. Can that be deducted?

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Answered in 7 hours by:
3/16/2018
Lev
Lev, Tax Advisor
Category: Tax
Satisfied Customers: 32,650
Experience: Taxes, Immigration, Labor Relations
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If someone owes you money that you can't collect, you may have a bad debt.

Generally, to deduct a bad debt, you must have previously included the amount in your income or loaned out your cash.

So in your situation - the amount of bad debt - is what your client PAID to the contractor and that may be just a part of the legal judgement which the contractor was obligated to pay back.

I understand that actual expenses to undo damages might be higher - but that difference may not be considered as "bad debt" - still will be added to the basis of the property.

Legal expenses may be only deducted if related to to your job to producing or collecting taxable income or getting tax advice.

It doesn't look as the client may deduct legal expenses related to that case.

So your only limited option is to deduct the bad debt.

Let me know if you need any help with reporting.

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Lev
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