[Topsya]

Here is the question:

The Hyldina Corporation has an account receivable for $10,000 from Prosgko Corporation that is outstanding at the end of Year One. The debt was incurred as a result of normal business tranactions. Prosgko is a relatively new customer from a neighboring town. Hyldina believes that there is an 8 percent chance of collecting this receivable. Hyldina is an accrual basis taxpayer. What can be deducted by Hyldina on the company’s Year One income tax return?

a. Zero

b. $800

c. $4,000

d. $10,000

What is the answer? Can we deduct partially worthless Business Bad Debts?

THANKSSSS!!!!!!!!

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REG - 80
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[0506597]

Answer A. Zero. Taxable deduction for bad debts are based on direct write off not estimate. So a book expense but not a tax expense.

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[0506597]

Answer A. Zero. Taxable deduction for bad debts are based on direct write off not estimate. So a book expense but not a tax expense.

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[Topsya]

Thank you for your response @0506597

I m still a little confused because it seems like a partially worthless debt and IRS has the following position:

https://www.irs.gov/taxtopics/tc453.html

AUD - 90
FAR - 83
BEC - 81
REG - 80
ETHICS - 100

[Topsya]

Thank you for your response @0506597

I m still a little confused because it seems like a partially worthless debt and IRS has the following position:

https://www.irs.gov/taxtopics/tc453.html

AUD - 90
FAR - 83
BEC - 81
REG - 80
ETHICS - 100

[Topsya]

Help me guys!…..

AUD - 90
FAR - 83
BEC - 81
REG - 80
ETHICS - 100

[Topsya]

Help me guys!…..

AUD - 90
FAR - 83
BEC - 81
REG - 80
ETHICS - 100

[wool1]

I don't see how that debt is a partially worthless debt.

[wool1]

I don't see how that debt is a partially worthless debt.

[mla1169]

The receivable is still on the company's books. If the company hasn't written it off, it can't make that adjustment for tax purposes only.

FAR- 77
AUD -49, 71, 84
REG -56,75!
BEC -75

Massachusetts CPA (non reporting) since 3/12.

[mla1169]

The receivable is still on the company's books. If the company hasn't written it off, it can't make that adjustment for tax purposes only.

FAR- 77
AUD -49, 71, 84
REG -56,75!
BEC -75

Massachusetts CPA (non reporting) since 3/12.

[Topsya]

But isnt it a Partially Worthless Bad Debt?

Besides, you constantly have differences between books and taxes… i still dont get it

AUD - 90
FAR - 83
BEC - 81
REG - 80
ETHICS - 100

[Topsya]

But isnt it a Partially Worthless Bad Debt?

Besides, you constantly have differences between books and taxes… i still dont get it

AUD - 90
FAR - 83
BEC - 81
REG - 80
ETHICS - 100

[mla1169]

No its not “partially worthless”. The company still maintains there is an 8% chance it will be collected. If you open up pub 535, it says “A debt becomes worthless when there is no longer any chance the amount owed will be paid.”

So a “partially worthless debt” is one where say your customer owes you $1000 but says they only intend to pay $800 for some valid reason. The difference is partially worthless.

An 8% chance of collecting an item isn't enough to determine what part of that item is worthless and because there is still some chance of collecting it in full, its not considered worthless. Because they are an accrual basis taxpayer they need to use the specific charge off method, which says “Partly worthless debts. You can deduct specific bad debts that become partly uncollectible during the tax year. Your tax deduction is limited to the amount you charge off on your books during the year. You do not have to charge off and deduct your partly worthless debts annually. You can delay the charge off until a later year. However, you cannot deduct any part of a debt after the year it becomes totally worthless. “

FAR- 77
AUD -49, 71, 84
REG -56,75!
BEC -75

Massachusetts CPA (non reporting) since 3/12.

[mla1169]

No its not “partially worthless”. The company still maintains there is an 8% chance it will be collected. If you open up pub 535, it says “A debt becomes worthless when there is no longer any chance the amount owed will be paid.”

So a “partially worthless debt” is one where say your customer owes you $1000 but says they only intend to pay $800 for some valid reason. The difference is partially worthless.

An 8% chance of collecting an item isn't enough to determine what part of that item is worthless and because there is still some chance of collecting it in full, its not considered worthless. Because they are an accrual basis taxpayer they need to use the specific charge off method, which says “Partly worthless debts. You can deduct specific bad debts that become partly uncollectible during the tax year. Your tax deduction is limited to the amount you charge off on your books during the year. You do not have to charge off and deduct your partly worthless debts annually. You can delay the charge off until a later year. However, you cannot deduct any part of a debt after the year it becomes totally worthless. “

FAR- 77
AUD -49, 71, 84
REG -56,75!
BEC -75

Massachusetts CPA (non reporting) since 3/12.

[Topsya]

Wow, Thank you SO MUCH! Great explanation! Appreciate it!

AUD - 90
FAR - 83
BEC - 81
REG - 80
ETHICS - 100

[Author]

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