| Practically every small business has receivables that it | | | | debt has become both worthless and will remain so. |
| cannot obtain from clients. If your small business | | | | You must also show that you took reasonable steps |
| doesn't have any such receivables, consider yourself | | | | to collect the receivables, but you are not necessarily |
| lucky. For those small businesses that suffer from | | | | required to go to court to meet this requirement. A |
| uncollected receivables, solace can be taken from the | | | | clear example where you would meet this requirement |
| fact you can claim a tax deduction. | | | | is if the debtor filed bankruptcy. |
| Bad Debt Tax Deduction | | | | While proving that you suffered a loss may sound like |
| A small business can write-off bad debt losses if it | | | | the easiest requirement to meet, the issue is a bit |
| meets nominal requirements. To claim such a tax | | | | more complicated. The Tax Code defines the loss as |
| deduction, the following must be shown: | | | | an amount that is included in your books as income, but |
| A. The existence of a legal relationship between the | | | | is never collected. A classic example of such a |
| small business and debtor; | | | | situation would be a manufacturer that provides |
| B. The receivables are worthless; and | | | | products to retailers on credit. The manufacturer can |
| C. The small business suffered an actual loss. | | | | show a real loss if the retailer files bankruptcy. |
| Proving there is a legal relationship between the small | | | | Unfortunately, there is almost no way to claim a loss if |
| business and debtor is fairly simple. You must simply | | | | you provide hourly services and use a cash |
| show that the debtor has a legal obligation to make a | | | | accounting method. The IRS does not consider the |
| payment. Most businesses issue invoices or sign | | | | expenditure of time and effort to be a sustained |
| contracts with debtors and these documents suffice | | | | economic loss. |
| to prove the legal relationship. If you are not putting | | | | Small businesses suffer all to often from uncollected |
| your business relationships in writing, you should begin | | | | receivables. If you failed to claim such losses as a tax |
| doing so immediately. | | | | deduction during your last three tax filing years, you |
| Proving receivables are worthless is slightly more | | | | should file amended tax returns to get a refund. |
| complex. A small business is required to show that the | | | | |