Bad Debt Deductions

Tax report

Both nonbusiness and business bad debts may be tax deductible. However, you'll need to demonstrate that you have satisfied certain preconditions first.

Nonbusiness Bad Debts

Nonbusiness bad debts typically arise from unpaid cash advances. Generally, for an allowable bad debt deduction, the debt must be "bona fide," requiring that any loan or
extension of credit was actually intended to be a loan rather than something else, such as a gift or capital contribution. For example, if you lend money to a relative or friend with the understanding
that it may not be repaid, you must consider it a gift rather than a loan.

A similar issue will sometimes arise when an individual extends money to a closely held corporation. For example, a federal appellate court recently denied a taxpayer's claimed bad debt deduction
because - despite the existence of loan paperwork documenting a $1 million "loan" from the taxpayer to her family-owned real estate company - the taxpayer had, at all times, treated the advance as
a capital contribution rather than a loan.*

As with business bad debts, discussed next, nonbusiness bad debt deductions can only be taken in the year the debt becomes worthless. However, nonbusiness bad debts must be completely
worthless to be deductible. You don't have to wait until a debt is due to determine that it is worthless. Nonbusiness bad debts are reported as short-term capital losses.

IOUBusiness Bad Debts

Deductible business bad debts are typically limited to loans to clients and suppliers, business loan guarantees that the taxpayer had to satisfy, and credit sales to customers.
Again, you must be prepared to demonstrate that the bad debt was bona fide. To claim uncollectible amounts due from customers as bad debts, you must have previously included the amounts in

A business bad debt must be either partially or completely "worthless" for the loss to be deductible. Whether it is worthless will again depend on all the facts and circumstances, but you may be able
to meet this requirement if you have taken reasonable steps to collect a debt and there is no longer any possibility that you will receive payment.

Monitor Outstanding Debts

To ensure that you don't miss out on a bad debt deduction, review your records carefully before the end of the year to pinpoint any potentially worthless receivables you
may still be carrying on the books. You also may be able to amend a prior year's business tax return to claim the loss .

2016 Mileage Rates

The good news is that gas prices are down. The bad news is that the IRS has announced reductions in the standard mileage rates for the use of an automobile for business,
medical, and moving purposes.

The new rates - effective January 1, 2016 - are as follows:

  • Business use of an owned or leased automobile - 54¢ per mile (down from 57.5¢ in 2015)
  • Use of a vehicle for medical purposes or moving expenses - 19¢ per mile (down from 23¢ in 2015)

Taxpayers use the business mileage rate to calculate the deductible costs of operating an automobile for business purposes. The medical and moving expense rates are used to calculate deductions
related to travel for necessary medical treatment and certain jobrelated moves.

Alternatively, taxpayers may generally choose to calculate the applicable deduction by using the actual costs associated with operating the vehicle.

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