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Tag Archive for Bad Debt

Can You Claim Losses on Deposits Held In Insolvent Financial Institutions And Ponzi-Type Investments?

If you suffered a loss on deposits you had with an insolvent financial institution, or in a ponzi-type investment scheme, all may not be totally lost.

You may be able to claim a deduction for losses on deposits in insolvent financial institutions, and the IRS affords you a number of choices of how to deduct these losses:

• You can treat the loss as a non-business bad debt, and deduct it as a short-term capital loss on Schedule D.
• You can deduct the loss as a casualty loss on Schedule A.
• You can deduct the loss as an ordinary loss under the “miscellaneous deductions subject to a 2% limit” section of Schedule A. Read more

“B” is for Bad Debt Expense

“B” is for bad debt expense.  As the name suggests, it is a debt that goes bad because the party who owes the money is unable to pay.  It is similar to a stock investment that goes bad because the company goes bankrupt.  If you buy a stock for $10 a share hoping the company will be profitable and you will be able to get your money back, but if they go bankrupt, the stock is worth $0.

Companies have bad debt expense when their customers can’t pay for the goods they have purchased.  For tax purposes the bad debt expense can be claimed when the receivable is written off.  Often times companies use an allowance to estimate the amount of bad debt that they will incur.  Maybe the estimate is 5% of accounts receivable.  That can be helpful for understanding the true financial position of a company, but for tax purposes, creating an estimate of the bad debts is not deductible.  It is only a tax deduction when the specific receivable is written off and you are not on the cash basis.

Individuals have a few different types of bad debt expense.  If I loan my friend $100 and then my friend is unable to pay me back I have lost my $100, but that is not a tax deduction.  That is a personal transaction which won’t affect the tax return.  If you are making investments that generate capital gains, then a bad debt would generate a capital loss.  If instead you are operating more like a bank and you are in the business of lending money, the investments would generate ordinary income (and self-employment taxes) so a bad debt expense would be an ordinary tax deduction.  When in doubt remember this one thing: the character of the bad debt expense is going to match the character of the income.

Taxes A to Z – still randomly meandering through tax topics, but at least for 26 posts in  alphabetical order.

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