Bad Debt

[Jamie H]

Was wondering if this will pass.
I had a customer who signed a contract for a small addition on 8/31/2011 for $44,497.00
about a week before start date the bank cancelled the loan, it was never reconciled and we never did the project. to date I have gotten nothing in terms of reimbursement form the owner and I know I'm entitled to write off my expenses. But I was wondering if I could technically write off the whole amount?

Thanks,
Jamie Hence

[MarkMc]

I think you're about 230 miles too far NNW for that to work.

[David Meiland]

Breach of contract is not the same thing as a bad debt. If you incurred expenses, they can be written off, whether or not you received any income from the project. If the owner was supposed to pay you and didn't, you can take action to collect the money. As far as I know, writing off a bad debt applies when you have loaned money and it becomes uncollectable. What you have are expenses that can be written off...

[TWhite]

You can't write off money you never had. But you can write off your costs that you actually paid for.

[parkwest]

Doesn't their down payment cover your start up costs?

[Happy Home]

But I was wondering if I could technically write off the whole amount

Like David and TW said. However to deduct bad debt you generally need a judgment, they went bankrupt or something similar ? A lumber yard has tons of bad debt every year. They get their lawyer to get a judgment on each so they can deduct the loss.

What kind of further deduction are they getting beyond the usual direct expenses ? That's the question ? Need some one here who has sat down with their lawyer and cpa and worked through this that can tell us.

It has been several years since I have been attached to such a scenario but I if I recall correctly if you get a judgment / bankruptcy you can deduct the loss in future years.

As for the OP - if it is the case you need to have a qualified tax person review it. Don't expect anything to happen unless you get a judgment for breech or similar.

[Happy Home]

Google writing off bad debt. Looks like a bad debt or a receivable must be counted as income at some point depending on your accounting methods. Thus you get a judgment or similar to write that down.

Here's a simple explanation:
http://www.taxformprocessing.com/tax/faq/tax23.htm

[dgbldr]

I think you're about 230 miles too far NNW for that to work.

Mark, I knew someday you'd say something really, really funny. This is it.

[J.Buesking]

You can write of expenses but not profit.

[Marven]

If you are on a cash basis: you write off the expenses you paid out and include in income what the client paid you.

If you are on an accrual basis: you report the 44k as income and deduct the expenses you paid out. you sue the contractor and then you can then deduct the unpaid balance of the 44k.

[Allan Edwards]

IIf you are on an accrual basis: you report the 44k as income and deduct the expenses you paid out. you sue the contractor and then you can then deduct the unpaid balance of the 44k.

Why would you report income you never received (and pay taxes on it), then sue (2-3 years + attorney fees, maybe win maybe not), if you do win the deduction of the 44k offsets the 44k previous income and you are back to zero! You've gained nothing.

I say no matter what the unreimbursed costs goes against cost of goods sold or expense to be written off, basically same difference.

[TWhite]

You can write off (deduct} what you spent and claim only what you got (received}.

[GregBradley]

Let's make this simple:

If you are using an accrual accounting system then you can't take anything as a bad debt unless you already claimed it as income. If you are using cash accounting then you never received the cash and you certainly didn't have to return it.

Let's say you bill a job for $50,000 and that "income" is added to your accounts receivable. They only pay you $10,000 and after some time you decide that the balance is uncollectable. THEN you can claim the remaining $40,000 as bad debt.

I believe you never claimed the income from the job so you can't write off the bad debt. The expenses do get written off since you spent that money.

However, I do think that the people 230 mile away could figure out a way to "expense" that and we would all end up paying for it. Many other state and local governments could probably do the same but they certainly aren't as good at it.

[MarkNov]

In Canada bad debts are deducted though the use of "Reserve for Bad Debt" account.

That account is set up at the beginning of each fiscal year, and the reserve amount has to included in next years income.

The reserve amount has to be "reasonable"

The result is a deferal of taxes for a year on a portion of your business income

Mark

[Joe Adams]

Unless there was a clause that said 100% of the contract amount was earned at signing if it was cancelled by the other party, I just don't see how this can be defined as bad debt. The contract was never completed and the work was never performed. Most of these contracts are contingent on financing which leaves a legitimate out for the consumer.