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State Income Tax Forms

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State Income Tax Forms

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The State Income Tax Forms

State income tax forms 10. State income tax forms   Business Bad Debts Table of Contents Introduction Topics - This chapter discusses: Useful Items - You may want to see: Definition of Business Bad DebtAccrual method. State income tax forms Cash method. State income tax forms Debt acquired from a decedent. State income tax forms Liquidation. State income tax forms Types of Business Bad Debts When a Debt Becomes Worthless How To Claim a Business Bad DebtSpecific Charge-Off Method Nonaccrual-Experience Method Recovery of a Bad DebtNet operating loss (NOL) carryover. State income tax forms Introduction You have a bad debt if you cannot collect money owed to you. State income tax forms A bad debt is either a business bad debt or a nonbusiness bad debt. State income tax forms This chapter discusses only business bad debts. State income tax forms Generally, a business bad debt is one that comes from operating your trade or business. State income tax forms You can deduct business bad debts on Schedule C (Form 1040) or your applicable business income tax return. State income tax forms All other bad debts are nonbusiness bad debts and are deductible only as short-term capital losses. State income tax forms For more information on nonbusiness bad debts, see Publication 550. State income tax forms Topics - This chapter discusses: Definition of business bad debt When a debt becomes worthless How to claim a business bad debt Recovery of a bad debt Useful Items - You may want to see: Publication 525 Taxable and Nontaxable Income 536 Net Operating Losses (NOLs) for Individuals, Estates, and Trusts 544 Sales and Other Dispositions of Assets 550 Investment Income and Expenses 556 Examination of Returns, Appeal Rights, and Claims for Refund Form (and Instructions) Schedule C (Form 1040) Profit or Loss From Business 1040X Amended U. State income tax forms S. State income tax forms Individual Income Tax Return 1045 Application for Tentative Refund 1139 Corporation Application for Tentative Refund 3115 Application for Change in Accounting Method See chapter 12 for information about getting publications and forms. State income tax forms Definition of Business Bad Debt A business bad debt is a loss from the worthlessness of a debt that was either: Created or acquired in your trade or business, or Closely related to your trade or business when it became partly or totally worthless. State income tax forms A debt is closely related to your trade or business if your primary motive for incurring the debt is business related. State income tax forms Bad debts of a corporation (other than an S corporation) are always business bad debts. State income tax forms Credit sales. State income tax forms   Business bad debts are mainly the result of credit sales to customers. State income tax forms Goods that have been sold, but not yet paid for, and services that have been performed, but not yet paid for, are recorded in your books as either accounts receivable or notes receivable. State income tax forms After a reasonable period of time, if you have tried to collect the amount due, but are unable to do so, the uncollectible part becomes a business bad debt. State income tax forms   Accounts or notes receivable valued at fair market value (FMV) when received are deductible only at that value, even though the FMV may be less than the face value. State income tax forms If you purchased an account receivable for less than its face value, and the receivable subsequently becomes worthless, the most you are allowed to deduct is the amount you paid to acquire it. State income tax forms    You can claim a business bad debt deduction only if the amount owed to you was previously included in gross income. State income tax forms This applies to amounts owed to you from all sources of taxable income, including sales, services, rents, and interest. State income tax forms Accrual method. State income tax forms   If you use the accrual method of accounting, you generally report income as you earn it. State income tax forms You can only claim a bad debt deduction for an uncollectible receivable if you have previously included the uncollectible amount in income. State income tax forms   If you qualify, you can use the nonaccrual-experience method of accounting discussed later. State income tax forms Under this method, you do not have to accrue income that, based on your experience, you do not expect to collect. State income tax forms Cash method. State income tax forms   If you use the cash method of accounting, you generally report income when you receive payment. State income tax forms You cannot claim a bad debt deduction for amounts owed to you because you never included those amounts in income. State income tax forms For example, a cash basis architect cannot claim a bad debt deduction if a client fails to pay the bill because the architect's fee was never included in income. State income tax forms Debts from a former business. State income tax forms   If you sell your business but retain its receivables, these debts are business debts because they arose out of your trade or business. State income tax forms If any of these receivables subsequently become worthless, the loss is still a business bad debt. State income tax forms Debt acquired from a decedent. State income tax forms   The character of a loss from debts of a business acquired from a decedent is determined in the same way as debts acquired on the purchase of a business. State income tax forms The executor of the decedent's estate treats any loss from the debts as a business bad debt if the debts were closely related to the decedent's trade or business when they became worthless. State income tax forms Otherwise, a loss from these debts becomes a nonbusiness bad debt for the decedent's estate. State income tax forms Liquidation. State income tax forms   If you liquidate your business and some of the accounts receivable that you retain become worthless, they become business bad debts. State income tax forms Types of Business Bad Debts Business bad debts may result from the following. State income tax forms Loans to clients and suppliers. State income tax forms   If you loan money to a client, supplier, employee, or distributor for a business reason and you are unable to collect the loan after attempting to do so, you have a business bad debt. State income tax forms Debts owed by political parties. State income tax forms   If a political party (or other organization that accepts contributions or spends money to influence elections) owes you money and the debt becomes worthless, you can claim a bad debt deduction only if all of the following requirements are met. State income tax forms You use the accrual method of accounting. State income tax forms The debt arose from the sale of goods or services in the ordinary course of your trade or business. State income tax forms More than 30% of your receivables accrued in the year of the sale were from sales to political parties. State income tax forms You made substantial and continuing efforts to collect on the debt. State income tax forms Loan or capital contribution. State income tax forms   You cannot claim a bad debt deduction for a loan you made to a corporation if, based on the facts and circumstances, the loan is actually a contribution to capital. State income tax forms Debts of an insolvent partner. State income tax forms   If your business partnership breaks up and one of your former partners becomes insolvent, you may have to pay more than your pro rata share of the partnership's debts. State income tax forms If you pay any part of the insolvent partner's share of the debts, you can claim a bad debt deduction for the amount you paid that is attributable to the insolvent partner's share. State income tax forms Business loan guarantee. State income tax forms   If you guarantee a debt that subsequently becomes worthless, the debt can qualify as a business bad debt if all the following requirements are met. State income tax forms You made the guarantee in the course of your trade or business. State income tax forms You have a legal duty to pay the debt. State income tax forms You made the guarantee before the debt became worthless. State income tax forms You meet this requirement if you reasonably expected you would not have to pay the debt without full reimbursement from the borrower. State income tax forms You received reasonable consideration for making the guarantee. State income tax forms You meet this requirement if you made the guarantee in accord with normal business practice or for a good faith business purpose. State income tax forms Example. State income tax forms Jane Zayne owns the Zayne Dress Company. State income tax forms She guaranteed payment of a $20,000 note for Elegant Fashions, a dress outlet. State income tax forms Elegant Fashions is one of Zayne's largest clients. State income tax forms Elegant Fashions later defaulted on the loan. State income tax forms As a result, Ms. State income tax forms Zayne paid the remaining balance of the loan in full to the bank. State income tax forms She can claim a business bad debt deduction only for the amount she paid, since her guarantee was made in the course of her trade or business for a good faith business purpose. State income tax forms She was motivated by the desire to retain one of her better clients and keep a sales outlet. State income tax forms Deductible in the year paid. State income tax forms   If you make a payment on a loan you guaranteed, you can deduct it in the year paid, unless you have rights against the borrower. State income tax forms Rights against a borrower. State income tax forms   When you make payment on a loan you guaranteed, you may have the right to take the place of the lender. State income tax forms The debt is then owed to you. State income tax forms If you have this right, or some other right to demand payment from the borrower, you cannot claim a bad debt deduction until these rights become partly or totally worthless. State income tax forms Joint debtor. State income tax forms   If two or more debtors jointly owe you money, your inability to collect from one does not enable you to deduct a proportionate amount as a bad debt. State income tax forms Sale of mortgaged property. State income tax forms   If mortgaged or pledged property is sold for less than the debt, the unpaid, uncollectible balance of the debt is a bad debt. State income tax forms When a Debt Becomes Worthless A debt becomes worthless when there is no longer any chance the amount owed will be paid. State income tax forms This may occur when the debt is due or prior to that date. State income tax forms To demonstrate worthlessness, you must only show that you have taken reasonable steps to collect the debt but were unable to do so. State income tax forms It is not necessary to go to court if you can show that a judgment from the court would be uncollectible. State income tax forms Bankruptcy of your debtor is generally good evidence of the worthlessness of at least a part of an unsecured and unpreferred debt. State income tax forms Property received for debt. State income tax forms   If you receive property in partial settlement of a debt, reduce the debt by the property's FMV, which becomes the property's basis. State income tax forms You can deduct the remaining debt as a bad debt if and when it becomes worthless. State income tax forms   If you later sell the property for more than its basis, any gain on the sale is due to the appreciation of the property. State income tax forms It is not a recovery of a bad debt. State income tax forms For information on the sale of an asset, see Publication 544. State income tax forms How To Claim a Business Bad Debt There are two methods to claim a business bad debt. State income tax forms The specific charge-off method. State income tax forms The nonaccrual-experience method. State income tax forms Generally, you must use the specific charge-off method. State income tax forms However, you may use the nonaccrual-experience method if you meet the requirements discussed later under Nonaccrual-Experience Method . State income tax forms Specific Charge-Off Method If you use the specific charge-off method, you can deduct specific business bad debts that become either partly or totally worthless during the tax year. State income tax forms However, with respect to partly worthless bad debts, your deduction is limited to the amount you charged off on your books during the year. State income tax forms Partly worthless debts. State income tax forms   You can deduct specific bad debts that become partly uncollectible during the tax year. State income tax forms Your tax deduction is limited to the amount you charge off on your books during the year. State income tax forms You do not have to charge off and deduct your partly worthless debts annually. State income tax forms You can delay the charge off until a later year. State income tax forms However, you cannot deduct any part of a debt after the year it becomes totally worthless. State income tax forms Significantly modified debt. State income tax forms   An exception to the charge-off rule exists for debt which has been significantly modified and on which the holder recognized gain. State income tax forms For more information, see Regulations section 1. State income tax forms 166-3(a)(3). State income tax forms Deduction disallowed. State income tax forms   Generally, you can claim a partial bad debt deduction only in the year you make the charge-off on your books. State income tax forms If, under audit, the IRS does not allow your deduction and the debt becomes partly worthless in a later tax year, you can deduct the amount you charged off in that year plus the disallowed amount charged off in the earlier year. State income tax forms The charge-off in the earlier year, unless reversed on your books, fulfills the charge-off requirement for the later year. State income tax forms Totally worthless debts. State income tax forms   If a debt becomes totally worthless in the current tax year, you can deduct the entire amount, less any amount deducted in an earlier tax year when the debt was only partly worthless. State income tax forms   You do not have to make an actual charge-off on your books to claim a bad debt deduction for a totally worthless debt. State income tax forms However, you may want to do so. State income tax forms If you do not and the IRS later rules the debt is only partly worthless, you will not be allowed a deduction for the debt in that tax year because a deduction of a partly worthless bad debt is limited to the amount actually charged off. State income tax forms See Partly worthless debts, earlier. State income tax forms Filing a claim for refund. State income tax forms   If you did not deduct a bad debt on your original return for the year it became worthless, you can file a claim for a credit or refund. State income tax forms If the bad debt was totally worthless, you must file the claim by the later of the following dates. State income tax forms 7 years from the date your original return was due (not including extensions). State income tax forms 2 years from the date you paid the tax. State income tax forms   If the claim is for a partly worthless bad debt, you must file the claim by the later of the following dates. State income tax forms 3 years from the date you filed your original return. State income tax forms 2 years from the date you paid the tax. State income tax forms You may have longer to file the claim if you were unable to manage your financial affairs due to a physical or mental impairment. State income tax forms Such an impairment requires proof of existence. State income tax forms   For details and more information about filing a claim, see Publication 556. State income tax forms Use one of the following forms to file a claim. State income tax forms For more information, see the instructions for the applicable form. State income tax forms Table 10-1. State income tax forms Forms Used To File a Claim IF you filed as a. State income tax forms . State income tax forms . State income tax forms THEN file. State income tax forms . State income tax forms . State income tax forms Sole proprietor or farmer Form 1040X Corporation Form 1120X S corporation Form 1120S and check box H(4) Partnership Form 1065X if filing on paper or  Form 1065 and check box G(5) if filing electronically Nonaccrual-Experience Method If you use an accrual method of accounting and qualify under the rules explained in this section, you can use the nonaccrual-experience method for bad debts. State income tax forms Under this method, you do not accrue service related income you expect to be uncollectible. State income tax forms Because the expected uncollectible amounts are not included in income, these amounts are not later deducted from income. State income tax forms Generally, you can use the nonaccrual-experience method for accounts receivable for services you performed only if: The services are provided in the fields of accounting, actuarial science, architecture, consulting, engineering, health, law, or the performing arts, or You meet the $5 million gross receipts test for all prior years. State income tax forms Service related income. State income tax forms   You can use the nonaccrual-experience method only for amounts earned by performing services. State income tax forms You cannot use this method for amounts owed to you from activities such as lending money, selling goods, or acquiring receivables or other rights to receive payment. State income tax forms Gross receipts test. State income tax forms   To find out if you meet the $5 million gross receipts test for all prior years, you must figure the average annual gross receipts for each prior year. State income tax forms If your average annual gross receipts for any year exceeds $5 million, you cannot use the non-accural experience method. State income tax forms   The average annual gross receipts for any year is the average of gross receipts from the year in question and the 2 previous years. State income tax forms For example, if you were figuring the average annual gross receipts for 2013, you would average your gross receipts for 2011, 2012, and 2013. State income tax forms Interest or penalty charged. State income tax forms   Generally, you cannot use the nonaccrual-experience method for amounts due on which you charge interest or a late payment penalty. State income tax forms However, do not treat a discount offered for early payment as the charging of interest or a penalty if both the following apply. State income tax forms You otherwise accrue the full amount due as gross income at the time you provide the services. State income tax forms You treat the discount allowed for early payment as an adjustment to gross income in the year of payment. State income tax forms Change in accounting method. State income tax forms   Generally, you must obtain consent to change to a nonaccrual-experience method (other than one of the safe harbor methods) or to change from one method to another. State income tax forms See Form 3115 and the Instructions for Form 3115 for more information. State income tax forms Recovery of a Bad Debt If you claim a deduction for a bad debt on your income tax return and later recover (collect) all or part of it, you may have to include all or part of the recovery in gross income. State income tax forms The amount you include is limited to the amount you actually deducted. State income tax forms However, you can exclude the amount deducted that did not reduce your tax. State income tax forms Report the recovery as “Other income” on the appropriate business form or schedule. State income tax forms See Recoveries in Publication 525 for more information. State income tax forms Net operating loss (NOL) carryover. State income tax forms   If a bad debt deduction increases an NOL carryover that has not expired before the beginning of the tax year in which the recovery takes place, you treat the deduction as having reduced your tax. State income tax forms A bad debt deduction that contributes to a NOL helps lower taxes in the year to which you carry the NOL. State income tax forms For more information about NOLs, see Publication 536. State income tax forms Also, see the Instructions for Form 1045, and the Instructions for Form 1139. 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