This deduction is not automatic so taxpayers should use caution. You must be able to show that the bad debt you are attempting to secure a deduction for is essentially worthless. This means that you should ramp up your collection efforts to show that the debts are uncollectible. If you are able to collect on the debt, then it helps your cash flow, but if you are unable to secure the payment from the client or vendor then you may be able to take the bad debt deduction on your 2024 tax return.
A cash-basis taxpayer may claim a business bad debt only if the amount that is owed was previously included in gross income. The business must also establish that the debt is not only legitimate, but that it cannot be recovered from the debtor. This means that you must make a “reasonable” effort to collect on the debt. Now, that doesn’t mean you need to file a lawsuit against the debtor, but you can’t just make a single phone call either. “Reasonable” in this case means multiple attempts to collect on the bad debt before it can be considered uncollectible.
If you haven’t begun your collection efforts yet, time is short so if you hope to claim a business bad debt deduction for 2024, you should spring into action. For example, you can start your collection efforts through phone and email contacts. If those methods don’t work, you may want to follow up with a series of letters or even hire a collection agency. If all else fails, our firm can help you with the prospects of claiming a business bad debt deduction on your 2024 tax return.