| Introduction | 1301 |
| Debt Must be Worthless | 1302 |
| Amount of Deduction | 1303 |
| Business Bad Debts | 1304 |
| Nonbusiness Bad Debts | 1305 |
| When Deductible | 1306 |
| Loss on Deposits in Insolvent Financial Institutions | 1307 |
| Recovery of Bad Debts | 1308 |
| Early Attempts at Income Taxation | 101 |
| The Present Income Tax Law | 102 |
| Introduction – General Principles – Definitions | 103 |
| Classification of Taxpayers | 104 |
| Purpose of the Income Tax Return – Withholding and Estimated Tax | 105 |
| Accounting Period -The Taxable Year | 106 |
| Accounting Methods | 107 |
| The Cash Basis | 108 |
| The Accrual Basis | 109 |
| Change in Accounting Method | 110 |
| When to File the Income Tax Return | 111 |
| Penalties | 112 |
| Installment Payment of Tax | 112A |
| Where and How To File Manual and Electronic Filing | 113 |
| Who Must File a Return | 114 |
| Joint Return of Husband & Wife | 115 |
| Separate Return of Husband & Wife | 116 |
| Who is considered as “Married”? | 117 |
| Special Provision for Married Persons Living Apart | 118 |
| Minors | 119 |
| The Tax Return Forms and Schedules | 120 |
| Payment of the Tax | 121 |
| Section II | |
| Introduction | 122 |
| Gross Income | 123 |
| Deductions from Gross Income | 124 |
| Adjusted Gross Income | 125 |
| Deductions from Adjusted Gross Income | 126 |
| Taxable Income | 127 |
| Tax Credits | 128 |
| The Filing Requirements for Special Taxpayers | 129 |
If money is owed to a taxpayer and the debt becomes uncollectible he may claim a “bad debt” deduction. The debt must be valid, legally enforceable, and in a fixed amount in order to be deductible. A gambling debt, for instance, in most states cannot be enforced and therefore will not qualify for a bad debt deduction. In the case of a debt owed by taxpayer’s relative the question arises as to whether it is a bona fide debt or merely a gift. If the circumstances indicate that the loan was made with a definite expectation of repayment, the deduction will be permitted. Otherwise, the deduction will be denied on the grounds that the taxpayer never really expected to receive his money back.
Example: Taxpayer loaned money to his son-in-law to go into a new business venture. He did not investigate whether the venture was sound or practical and the son-in-law had no means to secure the debt. The venture subsequently failed and the son-in-law was unable to repay the debt. No bad debt deduction is permitted because the taxpayer, by all indications, did not seriously expect repayment.
In particular, where loans are made to taxpayer’s children, the IRS will presume them to be gifts, unless the taxpayer is able to show convincing evidence to the contrary.
More in the Federal Tax Course
| Introduction | 1301 |
| Debt Must be Worthless | 1302 |
| Amount of Deduction | 1303 |
| Business Bad Debts | 1304 |
| Nonbusiness Bad Debts | 1305 |
| When Deductible | 1306 |
| Loss on Deposits in Insolvent Financial Institutions | 1307 |
| Recovery of Bad Debts | 1308 |
| Early Attempts at Income Taxation | 101 |
| The Present Income Tax Law | 102 |
| Introduction – General Principles – Definitions | 103 |
| Classification of Taxpayers | 104 |
| Purpose of the Income Tax Return – Withholding and Estimated Tax | 105 |
| Accounting Period -The Taxable Year | 106 |
| Accounting Methods | 107 |
| The Cash Basis | 108 |
| The Accrual Basis | 109 |
| Change in Accounting Method | 110 |
| When to File the Income Tax Return | 111 |
| Penalties | 112 |
| Installment Payment of Tax | 112A |
| Where and How To File Manual and Electronic Filing | 113 |
| Who Must File a Return | 114 |
| Joint Return of Husband & Wife | 115 |
| Separate Return of Husband & Wife | 116 |
| Who is considered as “Married”? | 117 |
| Special Provision for Married Persons Living Apart | 118 |
| Minors | 119 |
| The Tax Return Forms and Schedules | 120 |
| Payment of the Tax | 121 |
| Section II | |
| Introduction | 122 |
| Gross Income | 123 |
| Deductions from Gross Income | 124 |
| Adjusted Gross Income | 125 |
| Deductions from Adjusted Gross Income | 126 |
| Taxable Income | 127 |
| Tax Credits | 128 |
| The Filing Requirements for Special Taxpayers | 129 |
If money is owed to a taxpayer and the debt becomes uncollectible he may claim a “bad debt” deduction. The debt must be valid, legally enforceable, and in a fixed amount in order to be deductible. A gambling debt, for instance, in most states cannot be enforced and therefore will not qualify for a bad debt deduction. In the case of a debt owed by taxpayer’s relative the question arises as to whether it is a bona fide debt or merely a gift. If the circumstances indicate that the loan was made with a definite expectation of repayment, the deduction will be permitted. Otherwise, the deduction will be denied on the grounds that the taxpayer never really expected to receive his money back.
Example: Taxpayer loaned money to his son-in-law to go into a new business venture. He did not investigate whether the venture was sound or practical and the son-in-law had no means to secure the debt. The venture subsequently failed and the son-in-law was unable to repay the debt. No bad debt deduction is permitted because the taxpayer, by all indications, did not seriously expect repayment.
In particular, where loans are made to taxpayer’s children, the IRS will presume them to be gifts, unless the taxpayer is able to show convincing evidence to the contrary.
More in the Federal Tax Course