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Small Business Tax Deduction - Write-Off Bad Debts
By: Richard Chapo
Practically every small business has receivables that it cannot obtain from
clients. If your small business doesn't have any such receivables, consider
yourself lucky. For those small businesses that suffer from uncollected
receivables, solace can be taken from the fact you can claim a tax deduction.
Bad Debt Tax Deduction
A small business can write-off bad debt losses if it meets nominal requirements.
To claim such a tax deduction, the following must be shown:
A. The existence of a legal relationship between the small business and debtor;
B. The receivables are worthless; and
C. The small business suffered an actual loss.
Proving there is a legal relationship between the small business and debtor is
fairly simple. You must simply show that the debtor has a legal obligation to
make a payment. Most businesses issue invoices or sign contracts with debtors
and these documents suffice to prove the legal relationship. If you are not
putting your business relationships in writing, you should begin doing so
immediately.
Proving receivables are worthless is slightly more complex. A small business is
required to show that the debt has become both worthless and will remain so. You
must also show that you took reasonable steps to collect the receivables, but
you are not necessarily required to go to court to meet this requirement. A
clear example where you would meet this requirement is if the debtor filed
bankruptcy.
While proving that you suffered a loss may sound like the easiest requirement to
meet, the issue is a bit more complicated. The Tax Code defines the loss as an
amount that is included in your books as income, but is never collected. A
classic example of such a situation would be a manufacturer that provides
products to retailers on credit. The manufacturer can show a real loss if the
retailer files bankruptcy. Unfortunately, there is almost no way to claim a loss
if you provide hourly services and use a cash accounting method. The IRS does
not consider the expenditure of time and effort to be a sustained economic loss.
Small businesses suffer all to often from uncollected receivables. If you failed
to claim such losses as a tax deduction during your last three tax filing years,
you should file amended tax returns to get a refund.
About the Author:
Richard Chapo is CEO of
http://www.businesstaxrecovery.com - Obtaining tax
refunds for small businesses by finding overlooked tax deductions and credits
through a free tax return review.
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