How To Write Off Bad Debts

Wondering why you would need to know how to write off bad debts? In today’s economy, numerous people are defaulting on debts, both business and personal. If you have loaned money to someone and they have not repaid you, you may be able to claim a deduction on your taxes. To write off bad debts, simply follow these easy steps.

Things you'll need:

• All data regarding the debt
• Proper IRS forms

1. Verify that the loan is indeed uncollectible. In order to be able to write off bad debts, you must prove that they are either partially or totally uncollectible. You must exhaust all possible avenues of collection in order to prove the debt is indeed a bad debt. This would include things such as demand letters, collection agencies or even the filing of a small claims suit.
2. Get your facts straight. You will need to have all pertinent data regarding the bad debt, such as the date of the transaction, the amount of the debt, the date you determined it to be uncollectible and the amount that is uncollectible. If a debt is partially paid back, you can only write off the part of the debt that is considered worthless.
3. Determine the reason that the loan was made. You will need to know if the loan was part of a business transaction, such as an account receivable, or a personal transaction, such as an investment. This classification will determine how you will actually write off the bad debt.
4. Prepare the proper IRS forms. If the loan was made as part of a business transaction, such as accounts receivable, you can write off the bad debts as business deductions on the Federal Schedule C. If the loan was part of an investment, you will write off the bad debts as capital losses on Schedule D. For help with these forms, check out the IRS' official website.

See? It is really simple to write off bad debts as long as you have a few key pieces of information. As always, the easiest way to handle this situation is to ask a qualified professional. They know how to write off bad debts, along with a whole host of other deductions you may not have thought of!