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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
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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.
Why A Collection Agency Is Your Small Businesss Best Friend
Does the term collection agency put you on edge? If youre like many small business owners, the mountain of debt you accumulated during startup might have been enough to make you worry about collection agencies every time you answered the phone. But your feelings toward collection agencies are eventually going to change, if they havent already.
While no one wants to hire a small business collection agency, its a sad reality of doing business that not every customer feels the need to pay, or has the ability to pay all at once.
If you want to stay in business, youll need to collect that ..
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" target="_blank"> http://www.businesstaxrecovery.com - Obtaining tax refunds for small businesses by finding overlooked tax deductions and credits through a free tax return review.
Source: http://www.isnare.com Richard ChapoSmall Business Tax Deduction - Write-Off Bad Debts
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