Business Bad Debt Deduction

Henry Daniel Lively

Written by

Tax Lawyer - Newport Beach, CA

Contributor Level 20

Posted over 4 years ago. 8 helpful votes


Can you deduct Business Bad Debts on your tax return? Business bad debtors that arise from your business activities such as lending money for business purposes, selling inventory or credit, or guaranteeing business related loans may be tax deductible. You can deduct the losses on these loans as a business operating expense when they become wholly or partly worthless.

To receive the deduction you must have an actual loss of money or previously recognized the amount as income on your tax return. Therefore, we can summarize the requirements for the business bad deduction as follows: 1) You must have a bona fide business debt. 2) The debt is wholly or partly worthless. 3) You suffered a real economic loss form the debt.

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There are different types of debt, but all involve one person (the debtor) owing money to another (the creditor). Terms of repayment are governed by a contract.

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