If someone owes you money you cannot collect, you may have a bad debt. There are two kinds of bad debts, business bad debts and nonbusiness bad debts. A business bad debt is generally one that comes from operating your trade or business. You may be able to deduct business bad debts as an expense on your business tax return; however, there are different locations to report it on the return depending on which type of return you file.
Where To Deduct a Business Bad Debt:
- If you file as a Sole proprietor, then deduct your bad debt on Line 27 of Schedule C.
- If you file as a Farmer, then deduct your bad debt on Line 32 of Schedule F.
- If you file as an S corporation, then deduct your bad debt on Line 10 of Form 1120S.
- If you file as a Partnership, then deduct your bad debt on Line 12 of Form 1065.
- If you file as a C corporation, then deduct your business debt on Line 15 of Form 1120.
The data can be entered in the Federal Q&A interview screens for these forms. A business bad debt is a loss from the worthlessness of a debt that was either of the following:
- created or acquired in your business
- closely related to your business when it became partly or totally worthless.
A debt is closely related to your business if your primary motive for incurring the debt is a business reason.
Business bad debts are mainly the result of credit sales to customers. Goods and services customers have not paid for are shown in your books as either accounts receivable or notes receivable. If you have tried to collect the amount due, but are unable to do so, the uncollectible part is a business bad debt.
CAUTION -You can take a business bad debt deduction for these accounts and notes receivable only if the amount owed to you was previously included in gross income.
All other bad debts are nonbusiness bad debts and are deductible only as short-term capital losses on Schedule D of the taxpayer's return. The data would be entered in the Investment Income section of TaxAct®.
For more information on bad debts, please refer to the following publications:
IRS Publication 550 Investment Income and Expenses IRS Publication 535 Business Expenses IRS Publication 334 Small Business Tax Guide