Page 102 - Small Business Taxes

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Fileid: … tions/p535/2022/a/xml/cycle01/source
The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.
Property received for debt. If you receive rules the debt is only partly worthless, you will amount deducted that did not reduce your tax.
property in partial settlement of a debt, reduce not be allowed a deduction for the debt in that Report the recovery as “Other income” on the
the debt by the property's FMV, which becomes tax year because a deduction of a partly worth- appropriate business form or schedule.
the property's basis. You can deduct the re- less bad debt is limited to the amount actually
maining debt as a bad debt if and when it be- charged off. See Partly worthless debts, earlier. See Recoveries in Pub. 525 for more infor-
comes worthless. mation.
If you later sell the property for more than its Filing a claim for refund. If you didn’t deduct NOL carryover. If a bad debt deduction in-
basis, any gain on the sale is due to the appre- a bad debt on your original return for the year it creases an NOL carryover that has not expired
ciation of the property. It isn’t a recovery of a became worthless, you can file a claim for a before the beginning of the tax year in which the
bad debt. For information on the sale of an as- credit or refund. If the bad debt was totally recovery takes place, you treat the deduction as
set, see Pub. 544. worthless, you must file the claim by the later of having reduced your tax. A bad debt deduction
the following dates. that contributes to an NOL helps lower taxes in
How To Claim a • 7 years from the date your original return the year to which you carry the NOL. For more
was due (not including extensions).
information about NOLs for individuals, see
Business Bad Debt • 2 years from the date you paid the tax. Pub. 536. Also, see the Instructions for Form
If the claim is for a partly worthless bad debt,
1045, and the Instructions for Form 1139.
you must file the claim by the later of the follow-
There are two methods to claim a business bad ing dates.
debt. • 3 years from the date you filed your original
• The specific charge-off method. return.
• The nonaccrual-experience method. • 2 years from the date you paid the tax.
Generally, you must use the specific charge-off You may have longer to file the claim if you
method. However, you may use the nonac- were unable to manage your financial affairs 11.
crual-experience method if you meet the re- due to a physical or mental impairment. Such
quirements discussed later under Nonac- an impairment requires proof of existence.
crual-Experience Method. For details and more information about filing Other Expenses
a claim, see Pub. 556. Use one of the following
Specific Charge-off Method forms to file a claim. For more information, see
the instructions for the applicable form.
If you use the specific charge-off method, you What's New
can deduct specific business bad debts that be- Table 10-1. Forms Used To File a
come either partly or totally worthless during the Claim Standard mileage rate. For tax year 2022, the
tax year. However, with respect to partly worth- standard mileage rate for the cost of operating
less bad debts, your deduction is limited to the IF you filed as THEN file... your car, van, pickup, or panel truck for busi-
amount you charged off on your books during a... ness use is:
the year. • 58.5 cents per mile from January 1, 2022,
sole proprietor Form 1040-X. through June 30, 2022; and
Partly worthless debts. You can deduct spe- or farmer • 62.5 cents per mile from July 1, 2022,
cific bad debts that become partly uncollectible corporation Form 1120-X. through December 31, 2022.
during the tax year. Your tax deduction is limi-
ted to the amount you charge off on your books S corporation Form 1120-S and check For more information, see Car and truck ex-
during the year. You don’t have to charge off box H(4). penses under Miscellaneous Expenses, later.
and deduct your partly worthless debts annu- partnership Form 1065-X if filing on
ally. You can delay the charge-off until a later paper or Reminders
year. However, you can’t deduct any part of a Form 1065 and check box
debt after the year it becomes totally worthless. G(5) if filing electronically.
Significantly modified debt. An excep- No miscellaneous itemized deductions al-
lowed. You can no longer claim any miscella-
tion to the charge-off rule exists for debt that neous itemized deductions, including the de-
has been significantly modified and on which Nonaccrual-Experience duction for repayments (claim of right).
the holder recognized gain. For more informa- Method Miscellaneous itemized deductions are those
tion, see Regulations section 1.166-3(a)(3). deductions that would have been subject to the
Generally, a person using accrual accounting 2%-of-adjusted-gross-income limitation.
Deduction disallowed. Generally, you isn’t required to accrue a service-provided re-
can claim a partial bad debt deduction only in ceivable that experience shows won't be collec- Qualified business income deduction. For
the year you make the charge-off on your ted if: tax years beginning after 2017, individual tax-
books. If, under audit, the IRS doesn’t allow • The service provided is health, law, engi- payers and some trusts and estates may be en-
your deduction and the debt becomes partly neering, architecture, accounting, actuarial titled to a deduction of up to 20% of their quali-
worthless in a later tax year, you can deduct the science, performing arts, or consulting; or fied business income (QBI) from a trade or
amount you charged off in that year plus the • The person's average annual gross re- business, including income from a pass-through
disallowed amount charged off in the earlier ceipts for all previous 3‐tax‐year periods entity, but not from a C corporation, plus 20% of
year. The charge-off in the earlier year, unless don’t exceed $27 million. qualified real estate investment trust (REIT) div-
reversed on your books, fulfills the charge-off idends and qualified publicly traded partnership
requirement for the later year. See section 448 for details and exceptions. (PTP) income. The deduction is subject to mul-
tiple limitations, such as the type of trade or
Totally worthless debts. If a debt becomes business, the taxpayer’s taxable income, the
totally worthless in the current tax year, you can Recovery of a Bad Debt amount of W-2 wages paid in the trade or busi-
deduct the entire amount minus any amount de- ness, and the unadjusted basis immediately af-
ducted in an earlier tax year when the debt was If you claim a deduction for a bad debt on your ter acquisition (UBIA) of qualified property held
only partly worthless. income tax return and later recover (collect) all by the trade or business. The deduction can be
You don’t have to make an actual charge-off or part of it, you may have to include all or part taken in addition to the standard or itemized de-
on your books to claim a bad debt deduction for of the recovery in gross income. The amount ductions. See the Instructions for Form 8995
a totally worthless debt. However, you may you include is limited to the amount you actually and the Instructions for Form 8995-A for more
want to do so. If you don’t and the IRS later deducted. However, you can exclude the information.
Chapter 11 Other Expenses Page 43