How to Report Bad Debt on Income Tax

Filling out bad debt on a tax return

Bad debt is when you loan a person money and they do not repay the money. There are two types of bad debts: business or non-business. A business bad debt is debt acquired while in the course of business, whereas non-business bad debt is any personal bad debt. Business bad debts are deductible in full or in part. Non-business bad debt is only deductible when it is in full.

Instructions

1. Determine if the debt is genuine. To be genuine, you must expect the debtor to pay you back; if you do not, it is a gift. For instance, loaning money to your child when you do not fully expect him to pay the money back is a gift, not bad debt.

2. Determine if the debt is a business debt or non-business debt.

3. Find the basis in the debt. The basis is the amount you included as income or loaned out to someone.

4. Determine if you will be able to collect any of the money. If you think you may collect some of the money, you can only deduct the bad debt if it is a business bad debt. Only fully worthless bad debt is deductible as non-business bad debt.

5. Report non-business bad debt on Form 1040, Schedule D, Part I, Line 1. Write the debtor's name and "statement attached" in Column A. Write the amount of bad debt under Column F.

6. Write a statement explaining each non-business bad debt loss on Form 1040, Schedule D. In this statement, describe the debt, when the debt was due, the debtor's name and the debtor's relationship to you, any efforts you have made to collect the debt and why you think the debt will not be collected anymore. Attach this statement to Form 1040, Schedule D.

References

• IRS: Topic 453--Bad Debt Deduction
• IRS: Publication 550--Investment Income and Expenses
• IRS: Publication 535--Business Bad Debts