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Amend 2011 Taxes

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Amend 2011 Taxes

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The Amend 2011 Taxes

Amend 2011 taxes 10. Amend 2011 taxes   Business Bad Debts Table of Contents Introduction Topics - This chapter discusses: Useful Items - You may want to see: Definition of Business Bad DebtAccrual method. Amend 2011 taxes Cash method. Amend 2011 taxes Debt acquired from a decedent. Amend 2011 taxes Liquidation. Amend 2011 taxes Types of Business Bad Debts When a Debt Becomes Worthless How To Claim a Business Bad DebtSpecific Charge-Off Method Nonaccrual-Experience Method Recovery of a Bad DebtNet operating loss (NOL) carryover. Amend 2011 taxes Introduction You have a bad debt if you cannot collect money owed to you. Amend 2011 taxes A bad debt is either a business bad debt or a nonbusiness bad debt. Amend 2011 taxes This chapter discusses only business bad debts. Amend 2011 taxes Generally, a business bad debt is one that comes from operating your trade or business. Amend 2011 taxes You can deduct business bad debts on Schedule C (Form 1040) or your applicable business income tax return. Amend 2011 taxes All other bad debts are nonbusiness bad debts and are deductible only as short-term capital losses. Amend 2011 taxes For more information on nonbusiness bad debts, see Publication 550. Amend 2011 taxes Topics - This chapter discusses: Definition of business bad debt When a debt becomes worthless How to claim a business bad debt Recovery of a bad debt Useful Items - You may want to see: Publication 525 Taxable and Nontaxable Income 536 Net Operating Losses (NOLs) for Individuals, Estates, and Trusts 544 Sales and Other Dispositions of Assets 550 Investment Income and Expenses 556 Examination of Returns, Appeal Rights, and Claims for Refund Form (and Instructions) Schedule C (Form 1040) Profit or Loss From Business 1040X Amended U. Amend 2011 taxes S. Amend 2011 taxes Individual Income Tax Return 1045 Application for Tentative Refund 1139 Corporation Application for Tentative Refund 3115 Application for Change in Accounting Method See chapter 12 for information about getting publications and forms. Amend 2011 taxes Definition of Business Bad Debt A business bad debt is a loss from the worthlessness of a debt that was either: Created or acquired in your trade or business, or Closely related to your trade or business when it became partly or totally worthless. Amend 2011 taxes A debt is closely related to your trade or business if your primary motive for incurring the debt is business related. Amend 2011 taxes Bad debts of a corporation (other than an S corporation) are always business bad debts. Amend 2011 taxes Credit sales. Amend 2011 taxes   Business bad debts are mainly the result of credit sales to customers. Amend 2011 taxes Goods that have been sold, but not yet paid for, and services that have been performed, but not yet paid for, are recorded in your books as either accounts receivable or notes receivable. Amend 2011 taxes After a reasonable period of time, if you have tried to collect the amount due, but are unable to do so, the uncollectible part becomes a business bad debt. Amend 2011 taxes   Accounts or notes receivable valued at fair market value (FMV) when received are deductible only at that value, even though the FMV may be less than the face value. Amend 2011 taxes If you purchased an account receivable for less than its face value, and the receivable subsequently becomes worthless, the most you are allowed to deduct is the amount you paid to acquire it. Amend 2011 taxes    You can claim a business bad debt deduction only if the amount owed to you was previously included in gross income. Amend 2011 taxes This applies to amounts owed to you from all sources of taxable income, including sales, services, rents, and interest. Amend 2011 taxes Accrual method. Amend 2011 taxes   If you use the accrual method of accounting, you generally report income as you earn it. Amend 2011 taxes You can only claim a bad debt deduction for an uncollectible receivable if you have previously included the uncollectible amount in income. Amend 2011 taxes   If you qualify, you can use the nonaccrual-experience method of accounting discussed later. Amend 2011 taxes Under this method, you do not have to accrue income that, based on your experience, you do not expect to collect. Amend 2011 taxes Cash method. Amend 2011 taxes   If you use the cash method of accounting, you generally report income when you receive payment. Amend 2011 taxes You cannot claim a bad debt deduction for amounts owed to you because you never included those amounts in income. Amend 2011 taxes For example, a cash basis architect cannot claim a bad debt deduction if a client fails to pay the bill because the architect's fee was never included in income. Amend 2011 taxes Debts from a former business. Amend 2011 taxes   If you sell your business but retain its receivables, these debts are business debts because they arose out of your trade or business. Amend 2011 taxes If any of these receivables subsequently become worthless, the loss is still a business bad debt. Amend 2011 taxes Debt acquired from a decedent. Amend 2011 taxes   The character of a loss from debts of a business acquired from a decedent is determined in the same way as debts acquired on the purchase of a business. Amend 2011 taxes The executor of the decedent's estate treats any loss from the debts as a business bad debt if the debts were closely related to the decedent's trade or business when they became worthless. Amend 2011 taxes Otherwise, a loss from these debts becomes a nonbusiness bad debt for the decedent's estate. Amend 2011 taxes Liquidation. Amend 2011 taxes   If you liquidate your business and some of the accounts receivable that you retain become worthless, they become business bad debts. Amend 2011 taxes Types of Business Bad Debts Business bad debts may result from the following. Amend 2011 taxes Loans to clients and suppliers. Amend 2011 taxes   If you loan money to a client, supplier, employee, or distributor for a business reason and you are unable to collect the loan after attempting to do so, you have a business bad debt. Amend 2011 taxes Debts owed by political parties. Amend 2011 taxes   If a political party (or other organization that accepts contributions or spends money to influence elections) owes you money and the debt becomes worthless, you can claim a bad debt deduction only if all of the following requirements are met. Amend 2011 taxes You use the accrual method of accounting. Amend 2011 taxes The debt arose from the sale of goods or services in the ordinary course of your trade or business. Amend 2011 taxes More than 30% of your receivables accrued in the year of the sale were from sales to political parties. Amend 2011 taxes You made substantial and continuing efforts to collect on the debt. Amend 2011 taxes Loan or capital contribution. Amend 2011 taxes   You cannot claim a bad debt deduction for a loan you made to a corporation if, based on the facts and circumstances, the loan is actually a contribution to capital. Amend 2011 taxes Debts of an insolvent partner. Amend 2011 taxes   If your business partnership breaks up and one of your former partners becomes insolvent, you may have to pay more than your pro rata share of the partnership's debts. Amend 2011 taxes If you pay any part of the insolvent partner's share of the debts, you can claim a bad debt deduction for the amount you paid that is attributable to the insolvent partner's share. Amend 2011 taxes Business loan guarantee. Amend 2011 taxes   If you guarantee a debt that subsequently becomes worthless, the debt can qualify as a business bad debt if all the following requirements are met. Amend 2011 taxes You made the guarantee in the course of your trade or business. Amend 2011 taxes You have a legal duty to pay the debt. Amend 2011 taxes You made the guarantee before the debt became worthless. Amend 2011 taxes You meet this requirement if you reasonably expected you would not have to pay the debt without full reimbursement from the borrower. Amend 2011 taxes You received reasonable consideration for making the guarantee. Amend 2011 taxes You meet this requirement if you made the guarantee in accord with normal business practice or for a good faith business purpose. Amend 2011 taxes Example. Amend 2011 taxes Jane Zayne owns the Zayne Dress Company. Amend 2011 taxes She guaranteed payment of a $20,000 note for Elegant Fashions, a dress outlet. Amend 2011 taxes Elegant Fashions is one of Zayne's largest clients. Amend 2011 taxes Elegant Fashions later defaulted on the loan. Amend 2011 taxes As a result, Ms. Amend 2011 taxes Zayne paid the remaining balance of the loan in full to the bank. Amend 2011 taxes She can claim a business bad debt deduction only for the amount she paid, since her guarantee was made in the course of her trade or business for a good faith business purpose. Amend 2011 taxes She was motivated by the desire to retain one of her better clients and keep a sales outlet. Amend 2011 taxes Deductible in the year paid. Amend 2011 taxes   If you make a payment on a loan you guaranteed, you can deduct it in the year paid, unless you have rights against the borrower. Amend 2011 taxes Rights against a borrower. Amend 2011 taxes   When you make payment on a loan you guaranteed, you may have the right to take the place of the lender. Amend 2011 taxes The debt is then owed to you. Amend 2011 taxes If you have this right, or some other right to demand payment from the borrower, you cannot claim a bad debt deduction until these rights become partly or totally worthless. Amend 2011 taxes Joint debtor. Amend 2011 taxes   If two or more debtors jointly owe you money, your inability to collect from one does not enable you to deduct a proportionate amount as a bad debt. Amend 2011 taxes Sale of mortgaged property. Amend 2011 taxes   If mortgaged or pledged property is sold for less than the debt, the unpaid, uncollectible balance of the debt is a bad debt. Amend 2011 taxes When a Debt Becomes Worthless A debt becomes worthless when there is no longer any chance the amount owed will be paid. Amend 2011 taxes This may occur when the debt is due or prior to that date. Amend 2011 taxes To demonstrate worthlessness, you must only show that you have taken reasonable steps to collect the debt but were unable to do so. Amend 2011 taxes It is not necessary to go to court if you can show that a judgment from the court would be uncollectible. Amend 2011 taxes Bankruptcy of your debtor is generally good evidence of the worthlessness of at least a part of an unsecured and unpreferred debt. Amend 2011 taxes Property received for debt. Amend 2011 taxes   If you receive property in partial settlement of a debt, reduce the debt by the property's FMV, which becomes the property's basis. Amend 2011 taxes You can deduct the remaining debt as a bad debt if and when it becomes worthless. Amend 2011 taxes   If you later sell the property for more than its basis, any gain on the sale is due to the appreciation of the property. Amend 2011 taxes It is not a recovery of a bad debt. Amend 2011 taxes For information on the sale of an asset, see Publication 544. Amend 2011 taxes How To Claim a Business Bad Debt There are two methods to claim a business bad debt. Amend 2011 taxes The specific charge-off method. Amend 2011 taxes The nonaccrual-experience method. Amend 2011 taxes Generally, you must use the specific charge-off method. Amend 2011 taxes However, you may use the nonaccrual-experience method if you meet the requirements discussed later under Nonaccrual-Experience Method . Amend 2011 taxes Specific Charge-Off Method If you use the specific charge-off method, you can deduct specific business bad debts that become either partly or totally worthless during the tax year. Amend 2011 taxes However, with respect to partly worthless bad debts, your deduction is limited to the amount you charged off on your books during the year. Amend 2011 taxes Partly worthless debts. Amend 2011 taxes   You can deduct specific bad debts that become partly uncollectible during the tax year. Amend 2011 taxes Your tax deduction is limited to the amount you charge off on your books during the year. Amend 2011 taxes You do not have to charge off and deduct your partly worthless debts annually. Amend 2011 taxes You can delay the charge off until a later year. Amend 2011 taxes However, you cannot deduct any part of a debt after the year it becomes totally worthless. Amend 2011 taxes Significantly modified debt. Amend 2011 taxes   An exception to the charge-off rule exists for debt which has been significantly modified and on which the holder recognized gain. Amend 2011 taxes For more information, see Regulations section 1. Amend 2011 taxes 166-3(a)(3). Amend 2011 taxes Deduction disallowed. Amend 2011 taxes   Generally, you can claim a partial bad debt deduction only in the year you make the charge-off on your books. Amend 2011 taxes If, under audit, the IRS does not allow your deduction and the debt becomes partly worthless in a later tax year, you can deduct the amount you charged off in that year plus the disallowed amount charged off in the earlier year. Amend 2011 taxes The charge-off in the earlier year, unless reversed on your books, fulfills the charge-off requirement for the later year. Amend 2011 taxes Totally worthless debts. Amend 2011 taxes   If a debt becomes totally worthless in the current tax year, you can deduct the entire amount, less any amount deducted in an earlier tax year when the debt was only partly worthless. Amend 2011 taxes   You do not have to make an actual charge-off on your books to claim a bad debt deduction for a totally worthless debt. Amend 2011 taxes However, you may want to do so. Amend 2011 taxes If you do not and the IRS later rules the debt is only partly worthless, you will not be allowed a deduction for the debt in that tax year because a deduction of a partly worthless bad debt is limited to the amount actually charged off. Amend 2011 taxes See Partly worthless debts, earlier. Amend 2011 taxes Filing a claim for refund. Amend 2011 taxes   If you did not deduct a bad debt on your original return for the year it became worthless, you can file a claim for a credit or refund. Amend 2011 taxes If the bad debt was totally worthless, you must file the claim by the later of the following dates. Amend 2011 taxes 7 years from the date your original return was due (not including extensions). Amend 2011 taxes 2 years from the date you paid the tax. Amend 2011 taxes   If the claim is for a partly worthless bad debt, you must file the claim by the later of the following dates. Amend 2011 taxes 3 years from the date you filed your original return. Amend 2011 taxes 2 years from the date you paid the tax. Amend 2011 taxes You may have longer to file the claim if you were unable to manage your financial affairs due to a physical or mental impairment. Amend 2011 taxes Such an impairment requires proof of existence. Amend 2011 taxes   For details and more information about filing a claim, see Publication 556. Amend 2011 taxes Use one of the following forms to file a claim. Amend 2011 taxes For more information, see the instructions for the applicable form. Amend 2011 taxes Table 10-1. Amend 2011 taxes Forms Used To File a Claim IF you filed as a. Amend 2011 taxes . Amend 2011 taxes . Amend 2011 taxes THEN file. Amend 2011 taxes . Amend 2011 taxes . Amend 2011 taxes Sole proprietor or farmer Form 1040X Corporation Form 1120X S corporation Form 1120S and check box H(4) Partnership Form 1065X if filing on paper or  Form 1065 and check box G(5) if filing electronically Nonaccrual-Experience Method If you use an accrual method of accounting and qualify under the rules explained in this section, you can use the nonaccrual-experience method for bad debts. Amend 2011 taxes Under this method, you do not accrue service related income you expect to be uncollectible. Amend 2011 taxes Because the expected uncollectible amounts are not included in income, these amounts are not later deducted from income. Amend 2011 taxes Generally, you can use the nonaccrual-experience method for accounts receivable for services you performed only if: The services are provided in the fields of accounting, actuarial science, architecture, consulting, engineering, health, law, or the performing arts, or You meet the $5 million gross receipts test for all prior years. Amend 2011 taxes Service related income. Amend 2011 taxes   You can use the nonaccrual-experience method only for amounts earned by performing services. Amend 2011 taxes You cannot use this method for amounts owed to you from activities such as lending money, selling goods, or acquiring receivables or other rights to receive payment. Amend 2011 taxes Gross receipts test. Amend 2011 taxes   To find out if you meet the $5 million gross receipts test for all prior years, you must figure the average annual gross receipts for each prior year. Amend 2011 taxes If your average annual gross receipts for any year exceeds $5 million, you cannot use the non-accural experience method. Amend 2011 taxes   The average annual gross receipts for any year is the average of gross receipts from the year in question and the 2 previous years. Amend 2011 taxes For example, if you were figuring the average annual gross receipts for 2013, you would average your gross receipts for 2011, 2012, and 2013. Amend 2011 taxes Interest or penalty charged. Amend 2011 taxes   Generally, you cannot use the nonaccrual-experience method for amounts due on which you charge interest or a late payment penalty. Amend 2011 taxes However, do not treat a discount offered for early payment as the charging of interest or a penalty if both the following apply. Amend 2011 taxes You otherwise accrue the full amount due as gross income at the time you provide the services. Amend 2011 taxes You treat the discount allowed for early payment as an adjustment to gross income in the year of payment. Amend 2011 taxes Change in accounting method. Amend 2011 taxes   Generally, you must obtain consent to change to a nonaccrual-experience method (other than one of the safe harbor methods) or to change from one method to another. Amend 2011 taxes See Form 3115 and the Instructions for Form 3115 for more information. Amend 2011 taxes Recovery of a Bad Debt If you claim a deduction for a bad debt on your income tax return and later recover (collect) all or part of it, you may have to include all or part of the recovery in gross income. Amend 2011 taxes The amount you include is limited to the amount you actually deducted. Amend 2011 taxes However, you can exclude the amount deducted that did not reduce your tax. Amend 2011 taxes Report the recovery as “Other income” on the appropriate business form or schedule. Amend 2011 taxes See Recoveries in Publication 525 for more information. Amend 2011 taxes Net operating loss (NOL) carryover. Amend 2011 taxes   If a bad debt deduction increases an NOL carryover that has not expired before the beginning of the tax year in which the recovery takes place, you treat the deduction as having reduced your tax. Amend 2011 taxes A bad debt deduction that contributes to a NOL helps lower taxes in the year to which you carry the NOL. Amend 2011 taxes For more information about NOLs, see Publication 536. Amend 2011 taxes Also, see the Instructions for Form 1045, and the Instructions for Form 1139. Amend 2011 taxes Prev  Up  Next   Home   More Online Publications