There are two types of bad debts that can be deducted on your return- business and nonbusiness. According to the IRS:
- A business bad debt is when you have a debt that cannot be collected and the debt is related to your business.
- A nonbusiness bad debt is any debt that is not considered a business bad debt. Nonbusiness bad debts must be completely worthless. You must show that you have taken steps to try to collect the nonbusiness bad debt.
You can find additional information about bad debts, here.
Where do I report a bad debt deduction?
To report a business bad debt within the program, please follow this path:
- Federal Section
- Profit or Loss from Business (Schedule C)
- Other Expenses
To report a nonbusiness bad debt within the program, please follow this path:
- Federal Section
- Capital Gains and Losses
- Capital Gains and Loss Items
How do I complete the Capital Gains entry?
On the capital gains transaction entry page, follow these additional steps to report this information correctly.
- Description of Property: Enter in the name of debtor.
- Date Acquired: Select ‘Alternate Option’ and then select ‘Various-Short Term’ from drop-down menu.
- Date Sold: Select ‘Alternate Option’ and then select ‘Worthless-Short Term’ from drop-down menu.
- Sales Price: Enter in $0
- Select Cost Basis Type: Select ‘Did not receive Form 1099-B’
- Cost: Enter in your basis in the bad debt.
Adjustments: This entry can be left blank.
The IRS states that “A nonbusiness bad debt deduction requires a separate detailed statement attached to your return. The statement must contain: a description of the debt, including the amount and the date it became due; the name of the debtor, and any business or family relationship between you and the debtor; the efforts you made to collect the debt; and why you decided the debt was worthless.”
The program does not currently have a way to include a statement with your e-filed return. To include this statement with your return, you will have to paper file your return instead of choosing the e-file option.