Tax Planning: Deducting a Bad Debt

When a debt — whether business or personal — becomes uncollectible, it
can be claimed as a deduction on your tax return. You do not have to
wait until a debt is due to determine that it is worthless. A debt
becomes worthless when there is no longer any chance the amount owed
will be paid.

To deduct a bad debt, you must show that you have taken reasonable steps
to collect the debt. This includes sending statements, collection
letters, and making collection phone calls. Keep copies of all
correspondence and make notes of all telephone calls (date, time, who
you spoke with, what was said). You don't have to go to court as part of
your debt collection effort if you can show the IRS that a judgment
from the court would be uncollectible. The IRS considers bankruptcy of
the debtor as good evidence of the worthlessness of at least part of an
unsecured and unpreferred debt.

If you have debt on your books that you might want to deduct on your
2010 tax return, now is the time to make sure you meet the IRS
requirements for collection efforts and that the particular type of debt
qualifies under the IRS rules. Check with your accountant or tax
advisor if you have any questions.