EmailShare with:TweetBusiness bad debts can be written off on your tax return if certain requirements are met. A business bad debt is a debt that arises from your business activities. These bad debts can be written off as a business operating expense when the debt becomes wholly or partially worthless. However, be aware to actually claim the loss you must actually lose money or you must have previously included the amount in income on your tax return. This limitation usually precludes the business owner from taking a deduction.
The three requirements to deduct a business bad debt are as follows: 1) You must have a bona fide business bad debt, 2) The debt must be wholly or partially worthless, and 3) You must have suffered an economic loss from the debt.
A bona fide debt exists when someone has a legal obligation to pay you. This debt becomes wothtless in whole or in part when there is no longer any chance that you will be paid back a portion or the entire debt. An ecominic loss is incurred when you have already reported this amount as income, you paid out cash, or you made credit sales of inventory that were not paid for.