Page 33 - Tax Guide for Small Business

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The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.
To be deductible, a business expense must be both or- can take a bad debt deduction for an uncollectible receiv-
dinary and necessary. An ordinary expense is one that is able if you have included the uncollectible amount in in-
common and accepted in your field of business. A neces- come.
sary expense is one that is helpful and appropriate for
Cash method. If you use the cash method of account-
your business. An expense does not have to be indispen- ing, you normally report income when you receive pay-
sable to be considered necessary.
For more information about the general rules for de- ment. You cannot take a bad debt deduction for amounts
ducting business expenses, see chapter 1 in Pub. 535. owed to you that you have not received and cannot collect
if you never included those amounts in income.
If you have an expense that is partly for business
! and partly personal, separate the personal part More information. For more information about business
CAUTION from the business part. The personal part is not bad debts, see chapter 10 in Pub. 535.
deductible.
Nonbusiness bad debts. All other bad debts are non-
business bad debts and are deductible as short-term capi-
Useful Items tal losses on Form 8949 and Schedule D (Form 1040 or
You may want to see: 1040-SR). For more information on nonbusiness bad
debts, see Pub. 550, Investment Income and Expenses.
Publication
463 463 Travel, Gift, and Car Expenses Car and Truck Expenses
535 535 Business Expenses
946 946 How To Depreciate Property If you use your car or truck in your business, you may be
See chapter 12 for information about getting publications able to deduct the costs of operating and maintaining your
vehicle. You also may be able to deduct other costs of lo-
and forms.
cal transportation and traveling away from home overnight
on business.
Bad Debts Local transportation expenses. Local transportation

If someone owes you money you cannot collect, you have expenses include the ordinary and necessary costs of all
the following.
a bad debt. There are two kinds of bad debts—business
bad debts and nonbusiness bad debts. • Getting from one workplace to another in the course of
A business bad debt is generally one that comes from your business or profession when you are traveling
within the city or general area that is your tax home.
operating your trade or business. You may be able to de- Tax home is defined later.
duct business bad debts as an expense on your business
tax return. • Visiting clients or customers.
Business bad debt. A business bad debt is a loss from • Going to a business meeting away from your regular
workplace.
the worthlessness of a debt that was either of the follow-
ing. • Getting from your home to a temporary workplace
1. Created or acquired in your business. when you have one or more regular places of work.
These temporary workplaces can be either within the
2. Closely related to your business when it became area of your tax home or outside that area.
partly or totally worthless. Local business transportation does not include expenses
A debt is closely related to your business if your primary you have while traveling away from home overnight.
motive for incurring the debt is a business reason. Those expenses are deductible as travel expenses and
Business bad debts are mainly the result of credit sales are discussed later under Travel and Meals. However, if
to customers. They also can be the result of loans to sup- you use your car while traveling away from home over-
pliers, clients, employees, or distributors. Goods and serv- night, use the rules in this section to figure your car ex-
ices customers have not paid for are shown in your books pense deduction.
as either accounts receivable or notes receivable. If you Generally, your tax home is your regular place of busi-
are unable to collect any part of these accounts or notes ness, regardless of where you maintain your family home.
receivable, the uncollectible part is a business bad debt. It includes the entire city or general area in which your
You can take a bad debt deduction for these ac- business or work is located.
! counts and notes receivable only if the amount Example. You operate a printing business out of ren-
CAUTION you were owed was included in your gross in- ted office space. You use your van to deliver completed
come either for the year the deduction is claimed or for a jobs to your customers. You can deduct the cost of
prior year. round-trip transportation between your customers and
your print shop.
Accrual method. If you use an accrual method of ac-
counting, you normally report income as you earn it. You

Chapter 8 Business Expenses Page 31