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Bad Debt Deduction for Uncollected Wages

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Problem:

Last year your client, Barney Bumluck, worked part-time for Timely Tax Return Preparation Service. Barney was promised an hourly wage plus a commission. He worked under this arrangement from early February until April 15. His accrued pay amounted to $900 plus $120 of commissions. When he went to collect his pay however, he found only a vacant office with a sign on the door reading "Nothing is sure but death and taxes." Can Barney take a bad debt deduction for the wages and commission he was unable to collect?

Research aid Reg Section 1.166-1(e).

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Solution Summary

The firm takes a look at the situation of an employee of a firm who isn't paid the salary earned and is considering taking a bad debt deduction for it.

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The answer depends upon how Barney's pay was arranged. If Barney worked as an independent contractor and uses the accrual method of accounting, he can write off the debt so long as he reports the earnings. For example, if Barney does not report the income, then he cannot take the deduction. However, so long as he reports the income, he can deduct it. However, ...

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