Can you deduct Business Bad Debts on your tax return? Business bad debtrs 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.