Business and Non-Business Debt
- Business Debt- Business debt is accumulated by taking on debt through transactions that arise through transactions that you conduct in the normal course of operating your business. These debts must be taken on for the purposes for advancing your business. Business debts are even deductible even if they are only partial worthless. In this case, you would only be able to deduct that portion that was worthless. Some examples of this would include:
- Selling merchandise on credit and receiving payment
- A loan that is not repaid to you
- Not being able to collect on outstanding accounts due to the need to shut down your business.
- Non-Business Debt- This type of debt is accumulated by actions that you take that are not directly related to the operation of your business. This debt must be completely worthless before you can deduct it. Some examples of this would include:
- Lending money to a friend or related that you do not repay to you
- A deposit given to a contractor that later becomes insolvent
- Having money placed in an insured bank that becomes insolvent.
Requirements for Deducting
There are a few factors that you need to consider before you deduct your bad debt. You want to make sure that you meet all of the qualifications, otherwise you may be taking deductions that you are not entitled to.
- Debt Must Be Valid– A debt is considered valid when you can prove that you have the unconditional right to repayment.
- Valid Debtor-Creditor Relationship- There must be proof, that at the time you loaned the money, you had a valid debtor-creditor relationship with creditors like Achieve Finance. This means you must have a signed note or something similar from the debtor that sets out the terms of the loan and your relationship.
- You have a Basis of Debt- This means that the money that you loaned must have already been reported on one of your previous tax returns. You cannot deduct bad debt if it was made with money that you had not yet claimed
- Reasonable Effort-You must prove that you have made a reasonable effort to collect your money. This would include having gone to the courts to seek relief.
Failure to Claim Deduction
If you fail to claim a business debt in the year that it became worthless you have up to 7 years after the date you filed your tax return, or 2 years after you paid the taxes to file an amended return to receive either a refund or tax credit. If you fail to claim a non-business bad debt you have 3 years after you filed the tax return or two years after you paid the taxes to file an amendment and receive your refund or tax credit.
Whether you were not able to recoup loaned money for your business or for yourself, you are able to get back some of your losses by writing off the bad debt as a tax deduction. It is important to make sure that you understand how your debt qualifies as a deduction and that you take it in a timely manner. If you are worried about any of these factors it may be beneficial for you to meet with a qualified financial professional who can help you to correctly deduct the debt off your taxes.