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    Write-off of Bad Debts and Forgiveness Income

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    How is the write-off of a bad debt handled on the tax return? How must the debtor handle the forgiveness of the debt? Why?

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    Business bad debts may be deducted in several ways. IRC Section 166(a)(1) states that "There shall be allowed as a deduction any debt which becomes worthless within the taxable year." (In other words, the direct write-off method.) Further, IRC Section 166(a)(2) provides that "When satisfied that a debt is recoverable only in part, the Secretary may allow such debt, in an amount not in excess of the part charged off within the taxable year, as a deduction." (This is addressed further in Treas. Reg. 1.166-3.) In both cases, IRC Section 166(c) states that "the basis for determining the amount of the deduction for any bad debt shall be the adjusted basis provided in section 1011 for determining the loss from the sale or other disposition of property." Treas. Reg. 1.166-1 provides an in-depth discussion of business bad debt write-offs. In addition ...

    Solution Summary

    Citing legal authority, this solution discusses how the write-off of a bad debt is handled on the tax return and how the debtor must handle the forgiveness of the debt.