Uncertain times, a huge deficit and major enforcement policies will translate most likely into higher scrutiny by the Internal Revenue Service. Business, as well as individual returns need to be prepared accurately and with the appropriate documentation. As we all know, the position you take on a tax return can be viewed differently by the IRS. Be sure you understand the particular issues involved and have the proper documentation for your positions.
An area that will significantly increase on 2008 returns (and likely be heavily scrutinized by the IRS) are bad debt deductions. Unfortunately, increasing uncollectible accounts receivable and bad debt are just one of the issues facing our clients in this difficult economic climate. It is imperative that the proper steps be taken in order to maximize the benefit from and to substantiate tax deductions related to bad debt.
Bad Debts – Business. A bad debt comes from operating your business and is classified as an ordinary loss. Be sure there is proper documentation for the debt being written off.
A debt becomes worthless when the surrounding facts and circumstances indicate there is no longer any chance the amount owed will be paid. To show a debt is worthless you must establish that you have taken reasonable steps to collect the debt. It is not necessary to go to the court if you can show that a judgment from the court would be uncollectible. You may take the deduction only in the year the debt becomes worthless. You do not have to wait until a debt is due to determine whether it is worthless.
Business bad debts may be deducted in part or in full.
Bad Debts - Non Business. Debts that are personal are classified as investments and cannot be written off as an ordinary deduction. The loss is treated as a capital loss and can only be offset by capital gains, with the exception of $3,000 annually. Accordingly, proper planning, timing and analysis of opportunities to match bad debts with the recognition of capital gains is key to maximizing the tax benefits related to non business bad debt.
Contact Us for More Information
Would you like to learn more about how to maximize your bad debt write offs? Our firm is based on building strong relationships and connecting with our clients – to make sure that no opportunities are missed. Please contact Barry Schimler (bschimler@bspj.com) 678.741.2510 or Marshall Schwartz (mschwartz@bspj.com) 678.741.2524 with any questions about steps you can take to maximize your opportunities for tax savings.
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