What is Business and nonbusiness bad debts?
In short
A business bad debt is an ordinary deduction when it becomes wholly or partly worthless. A nonbusiness bad debt, such as a personal loan to a friend, is a short-term capital loss and only when wholly worthless.
Key takeaways
- The taxpayer must have basis in the debt; a cash-basis taxpayer can't deduct unpaid fees or wages never reported as income.
- For tax, the specific charge-off method is used, not an allowance.
- A loan to family must be a real debt, not a disguised gift.
Where it's tested
REG: Individual Taxation: Adjustments & Deductions — study notes, a five-minute revision sheet and practice questions.
Practise: 3 questions
Question 1 of 3 · 0 answered
Under the One Big Beautiful Bill Act, what is the state and local tax (SALT) deduction cap, and is it permanent?