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1040ez gov 30. 1040ez gov   How To Figure Your Tax Table of Contents Introduction Figuring Your Tax Alternative Minimum Tax (AMT) Tax Figured by IRSFiling the Return Introduction After you have figured your income and deductions as explained in Parts One through Five, your next step is to figure your tax. 1040ez gov This chapter discusses: The general steps you take to figure your tax, An additional tax you may have to pay called the alternative minimum tax (AMT), and The conditions you must meet if you want the IRS to figure your tax. 1040ez gov Figuring Your Tax Your income tax is based on your taxable income. 1040ez gov After you figure your income tax and AMT, if any, subtract your tax credits and add any other taxes you may owe. 1040ez gov The result is your total tax. 1040ez gov Compare your total tax with your total payments to determine whether you are entitled to a refund or if you must make a payment. 1040ez gov This section provides a general outline of how to figure your tax. 1040ez gov You can find step-by-step directions in the Instructions for Forms 1040EZ, 1040A, and 1040. 1040ez gov If you are unsure of which tax form you should file, see Which Form Should I Use? in chapter 1. 1040ez gov Tax. 1040ez gov   Most taxpayers use either the Tax Table or the Tax Computation Worksheet to figure their income tax. 1040ez gov However, there are special methods if your income includes any of the following items. 1040ez gov A net capital gain. 1040ez gov (See chapter 16. 1040ez gov ) Qualified dividends taxed at the same rates as a net capital gain. 1040ez gov (See chapters 8 and 16. 1040ez gov ) Lump-sum distributions. 1040ez gov (See chapter 10. 1040ez gov ) Farming or fishing income. 1040ez gov (See Schedule J (Form 1040), Income Averaging for Farmers and Fishermen. 1040ez gov ) Unearned income over $2,000 for certain children. 1040ez gov (See chapter 31. 1040ez gov ) Parents' election to report child's interest and dividends. 1040ez gov (See chapter 31. 1040ez gov ) Foreign earned income exclusion or the housing exclusion. 1040ez gov (See Form 2555, Foreign Earned Income, or Form 2555-EZ, Foreign Earned Income Exclusion, and the Foreign Earned Income Tax Worksheet in the Form 1040 instructions. 1040ez gov ) Credits. 1040ez gov   After you figure your income tax and any AMT (discussed later), determine if you are eligible for any tax credits. 1040ez gov Eligibility information for these tax credits is discussed in chapters 32 through 37 and your form instructions. 1040ez gov The following table lists the credits you may be able to subtract from your tax and shows where you can find more information on each credit. 1040ez gov CREDITS For information on: See  chapter: Adoption 37 Alternative motor vehicle 37 Alternative fuel vehicle refueling  property 37 Child and dependent care 32 Child tax 34 Credit to holders of tax credit  bonds 37 Education 35 Elderly or disabled 33 Electric vehicle 37 Foreign tax 37 Mortgage interest 37 Prior year minimum tax 37 Residential energy 37 Retirement savings contributions 37   Some credits (such as the earned income credit) are not listed because they are treated as payments. 1040ez gov See Payments , later. 1040ez gov   There are other credits that are not discussed in this publication. 1040ez gov These include the following credits. 1040ez gov General business credit, which is made up of several separate business-related credits. 1040ez gov These generally are reported on Form 3800, General Business Credit, and are discussed in chapter 4 of Publication 334, Tax Guide for Small Business. 1040ez gov Renewable electricity, refined coal, and Indian coal production credit for electricity and refined coal produced at facilities placed in service after October 22, 2004 (after October 2, 2008, for electricity produced from marine and hydrokinetic renewables), and Indian coal produced at facilities placed in service after August 8, 2005. 1040ez gov See Form 8835, Part II. 1040ez gov Work opportunity credit. 1040ez gov See Form 5884. 1040ez gov Credit for employer social security and Medicare taxes paid on certain employee tips. 1040ez gov See Form 8846. 1040ez gov Other taxes. 1040ez gov   After you subtract your tax credits, determine whether there are any other taxes you must pay. 1040ez gov This chapter does not explain these other taxes. 1040ez gov You can find that information in other chapters of this publication and your form instructions. 1040ez gov See the following table for other taxes you may need to add to your income tax. 1040ez gov OTHER TAXES For information on: See  chapter: Additional taxes on qualified retirement plans and IRAs 10, 17 Household employment taxes 32 Recapture of an education credit 35 Social security and Medicare tax on wages 5 Social security and Medicare tax on tips 6 Uncollected social security and Medicare tax on tips 6   You also may have to pay AMT (discussed later in this chapter). 1040ez gov   There are other taxes that are not discussed in this publication. 1040ez gov These include the following items. 1040ez gov Self-employment tax. 1040ez gov You must figure this tax if either of the following applies to you (or your spouse if you file a joint return). 1040ez gov Your net earnings from self-employment from other than church employee income were $400 or more. 1040ez gov The term “net earnings from self-employment” may include certain nonemployee compensation and other amounts reported to you on Form 1099-MISC, Miscellaneous Income. 1040ez gov If you received a Form 1099-MISC, see the Instructions for Recipient on the back. 1040ez gov Also see the Instructions for Schedule SE (Form 1040), Self-Employment Tax; and Publication 334, Tax Guide for Small Business. 1040ez gov You had church employee income of $108. 1040ez gov 28 or more. 1040ez gov Additional Medicare Tax. 1040ez gov Beginning in 2013, you may be subject to a 0. 1040ez gov 9% Additional Medicare Tax that applies to Medicare wages, Railroad Retirement Act compensation, and self-employment income over a threshold based on your filing status. 1040ez gov For more information, see the Instructions for Form 1040, line 60 and Form 8959. 1040ez gov Net Investment Income Tax (NIIT). 1040ez gov Beginning in 2013, you may be subject to Net Investment Income Tax (NIIT). 1040ez gov NIIT is a 3. 1040ez gov 8% tax on the lesser of net investment income or the excess of your modified adjusted gross income over a threshold amount. 1040ez gov For more information, see the Instructions for Form 1040, line 60 and Form 8960. 1040ez gov Recapture taxes. 1040ez gov You may have to pay these taxes if you previously claimed an investment credit, a low-income housing credit, a new markets credit, a qualified plug-in electric drive motor vehicle credit, an alternative motor vehicle credit, a credit for employer-provided child care facilities, an Indian employment credit, or other credits listed in the instructions for Form 1040, line 60. 1040ez gov For more information, see the instructions for Form 1040, line 60. 1040ez gov Section 72(m)(5) excess benefits tax. 1040ez gov If you are (or were) a 5% owner of a business and you received a distribution that exceeds the benefits provided for you under the qualified pension or annuity plan formula, you may have to pay this additional tax. 1040ez gov See Tax on Excess Benefits in chapter 4 of Publication 560, Retirement Plans for Small Business. 1040ez gov Uncollected social security and Medicare tax on group-term life insurance. 1040ez gov If your former employer provides you with more than $50,000 of group-term life insurance coverage, you must pay the employee part of social security and Medicare taxes on those premiums. 1040ez gov The amount should be shown in box 12 of your Form W-2 with codes M and N. 1040ez gov Tax on golden parachute payments. 1040ez gov This tax applies if you received an “excess parachute payment” (EPP) due to a change in a corporation's ownership or control. 1040ez gov The amount should be shown in box 12 of your Form W-2 with code K. 1040ez gov See the instructions for Form 1040, line 60. 1040ez gov Tax on accumulation distribution of trusts. 1040ez gov This applies if you are the beneficiary of a trust that accumulated its income instead of distributing it currently. 1040ez gov See Form 4970 and its instructions. 1040ez gov Additional tax on HSAs or MSAs. 1040ez gov If amounts contributed to, or distributed from, your health savings account or medical savings account do not meet the rules for these accounts, you may have to pay additional taxes. 1040ez gov See Publication 969, Health Savings Accounts and Other Tax-Favored Health Plans; Form 8853, Archer MSAs and Long-Term Care Insurance Contracts; Form 8889, Health Savings Accounts (HSAs); and Form 5329, Additional Taxes on Qualified Plans (Including IRAs) and Other Tax-Favored Accounts. 1040ez gov Additional tax on Coverdell ESAs. 1040ez gov This applies if amounts contributed to, or distributed from, your Coverdell ESA do not meet the rules for these accounts. 1040ez gov See Publication 970, Tax Benefits for Education, and Form 5329. 1040ez gov Additional tax on qualified tuition programs. 1040ez gov This applies to amounts distributed from qualified tuition programs that do not meet the rules for these accounts. 1040ez gov See Publication 970 and Form 5329. 1040ez gov Excise tax on insider stock compensation from an expatriated corporation. 1040ez gov You may owe a 15% excise tax on the value of nonstatutory stock options and certain other stock-based compensation held by you or a member of your family from an expatriated corporation or its expanded affiliated group in which you were an officer, director, or more-than-10% owner. 1040ez gov For more information, see the instructions for Form 1040, line 60. 1040ez gov Additional tax on income you received from a nonqualified deferred compensation plan that fails to meet certain requirements. 1040ez gov This income should be shown in Form W-2, box 12, with code Z, or in Form 1099-MISC, box 15b. 1040ez gov For more information, see the instructions for Form 1040, line 60. 1040ez gov Interest on the tax due on installment income from the sale of certain residential lots and timeshares. 1040ez gov For more information, see the instructions for Form 1040, line 60. 1040ez gov Interest on the deferred tax on gain from certain installment sales with a sales price over $150,000. 1040ez gov For more information, see the instructions for Form 1040, line 60. 1040ez gov Repayment of first-time homebuyer credit. 1040ez gov For more information, see Form 5405, Repayment of the First-Time Homebuyer Credit, and its instructions. 1040ez gov Also see the instructions for Form 1040, line 59b. 1040ez gov Payments. 1040ez gov   After you determine your total tax, figure the total payments you have already made for the year. 1040ez gov Include credits that are treated as payments. 1040ez gov This chapter does not explain these payments and credits. 1040ez gov You can find that information in other chapters of this publication and your form instructions. 1040ez gov See the following table for amounts you can include in your total payments. 1040ez gov PAYMENTS For information on: See  chapter: Child tax credit (additional) 34 Earned income credit 36 Estimated tax paid 4 Excess social security   and RRTA tax withheld 37 Federal income tax withheld 4 Health coverage tax credit 37 Credit for tax on   undistributed capital gain 37 Tax paid with extension 1   Another credit that is treated as a payment is the credit for federal excise tax paid on fuels. 1040ez gov This credit is for persons who have a nontaxable use of certain fuels, such as diesel fuel and kerosene. 1040ez gov It is claimed on Form 1040, line 70. 1040ez gov See Form 4136, Credit for Federal Tax Paid on Fuels. 1040ez gov Refund or balance due. 1040ez gov   To determine whether you are entitled to a refund or whether you must make a payment, compare your total payments with your total tax. 1040ez gov If you are entitled to a refund, see your form instructions for information on having it directly deposited into one or more of your accounts, or to purchase U. 1040ez gov S. 1040ez gov savings bonds instead of receiving a paper check. 1040ez gov Alternative Minimum Tax (AMT) This section briefly discusses an additional tax you may have to pay. 1040ez gov The tax law gives special treatment to some kinds of income and allows special deductions and credits for some kinds of expenses. 1040ez gov Taxpayers who benefit from this special treatment may have to pay at least a minimum amount of tax through an additional tax called AMT. 1040ez gov You may have to pay the AMT if your taxable income for regular tax purposes, combined with certain adjustments and tax preference items, is more than a certain amount. 1040ez gov See Form 6251, Alternative Minimum Tax — Individuals. 1040ez gov Adjustments and tax preference items. 1040ez gov   The more common adjustments and tax preference items include: Addition of personal exemptions, Addition of the standard deduction (if claimed), Addition of itemized deductions claimed for state and local taxes, certain interest, most miscellaneous deductions, and part of medical expenses, Subtraction of any refund of state and local taxes included in gross income, Changes to accelerated depreciation of certain property, Difference between gain or loss on the sale of property reported for regular tax purposes and AMT purposes, Addition of certain income from incentive stock options, Change in certain passive activity loss deductions, Addition of certain depletion that is more than the adjusted basis of the property, Addition of part of the deduction for certain intangible drilling costs, and Addition of tax-exempt interest on certain private activity bonds. 1040ez gov More information. 1040ez gov   For more information about the AMT, see the instructions for Form 6251. 1040ez gov Tax Figured by IRS If you file by April 15, 2014, you can have the IRS figure your tax for you on Form 1040EZ, Form 1040A, or Form 1040. 1040ez gov If the IRS figures your tax and you paid too much, you will receive a refund. 1040ez gov If you did not pay enough, you will receive a bill for the balance. 1040ez gov To avoid interest or the penalty for late payment, you must pay the bill within 30 days of the date of the bill or by the due date for your return, whichever is later. 1040ez gov The IRS can also figure the credit for the elderly or the disabled and the earned income credit for you. 1040ez gov When the IRS cannot figure your tax. 1040ez gov   The IRS cannot figure your tax for you if any of the following apply. 1040ez gov You want your refund directly deposited into your accounts. 1040ez gov You want any part of your refund applied to your 2014 estimated tax. 1040ez gov You had income for the year from sources other than wages, salaries, tips, interest, dividends, taxable social security benefits, unemployment compensation, IRA distributions, pensions, and annuities. 1040ez gov Your taxable income is $100,000 or more. 1040ez gov You itemize deductions. 1040ez gov You file any of the following forms. 1040ez gov Form 2555, Foreign Earned Income. 1040ez gov Form 2555-EZ, Foreign Earned Income Exclusion. 1040ez gov Form 4137, Social Security and Medicare Tax on Unreported Tip Income. 1040ez gov Form 4970, Tax on Accumulation Distribution of Trusts. 1040ez gov Form 4972, Tax on Lump-Sum Distributions. 1040ez gov Form 6198, At-Risk Limitations. 1040ez gov Form 6251, Alternative Minimum Tax—Individuals. 1040ez gov Form 8606, Nondeductible IRAs. 1040ez gov Form 8615, Tax for Certain Children Who Have Unearned Income. 1040ez gov Form 8814, Parents' Election To Report Child's Interest and Dividends. 1040ez gov Form 8839, Qualified Adoption Expenses. 1040ez gov Form 8853, Archer MSAs and Long-Term Care Insurance Contracts. 1040ez gov Form 8889, Health Savings Accounts (HSAs). 1040ez gov Form 8919, Uncollected Social Security and Medicare Tax on Wages. 1040ez gov Filing the Return After you complete the line entries for the tax form you are filing, fill in your name and address. 1040ez gov Enter your social security number in the space provided. 1040ez gov If you are married, enter the social security numbers of you and your spouse even if you file separately. 1040ez gov Sign and date your return and enter your occupation(s). 1040ez gov If you are filing a joint return, both you and your spouse must sign it. 1040ez gov Enter your daytime phone number in the space provided. 1040ez gov This may help speed the processing of your return if we have a question that can be answered over the phone. 1040ez gov If you are filing a joint return, you may enter either your or your spouse's daytime phone number. 1040ez gov If you want to allow a friend, family member, or any other person you choose to discuss your 2013 tax return with the IRS, check the “Yes” box in the “Third party designee” area on your return. 1040ez gov Also enter the designee's name, phone number, and any five digits the designee chooses as his or her personal identification number (PIN). 1040ez gov If you check the “Yes” box, you, and your spouse if filing a joint return, are authorizing the IRS to call the designee to answer any questions that may arise during the processing of your return. 1040ez gov Fill in and attach any schedules and forms asked for on the lines you completed to your paper return. 1040ez gov Attach a copy of each of your Forms W-2 to your paper return. 1040ez gov Also attach to your paper return any Form 1099-R you received that has withholding tax in box 4. 1040ez gov Mail your return to the Internal Revenue Service Center for the area where you live. 1040ez gov A list of Service Center addresses is in the instructions for your tax return. 1040ez gov Form 1040EZ Line Entries Read lines 1 through 8b and fill in the lines that apply to you. 1040ez gov Do not complete lines 9 through 12. 1040ez gov If you are filing a joint return, use the space to the left of line 6 to separately show your taxable income and your spouse's taxable income. 1040ez gov Payments. 1040ez gov   Enter any federal income tax withheld on line 7. 1040ez gov Federal income tax withheld is shown on Form W-2, box 2, or Form 1099, box 4. 1040ez gov Earned income credit. 1040ez gov   If you can take this credit, as discussed in chapter 36, the IRS can figure it for you. 1040ez gov Enter “EIC” in the space to the left of line 8a. 1040ez gov Enter the nontaxable combat pay you elect to include in earned income on line 8b. 1040ez gov   If your credit for any year after 1996 was reduced or disallowed by the IRS, you may also have to file Form 8862, Information To Claim Earned Income Credit After Disallowance, with your return. 1040ez gov For details, see the Form 1040EZ Instructions. 1040ez gov Form 1040A Line Entries Read lines 1 through 27 and fill in the lines that apply to you. 1040ez gov If you are filing a joint return, use the space to the left of the entry space for line 27 to separately show your taxable income and your spouse's taxable income. 1040ez gov Do not complete line 28. 1040ez gov Complete lines 29 through 33 and 36 through 40 if they apply to you. 1040ez gov However, do not fill in lines 30 and 38a if you want the IRS to figure the credits shown on those lines. 1040ez gov Also, enter any write-in information that applies to you in the space to the left of line 41. 1040ez gov Do not complete lines 34, 35, and 42 through 46. 1040ez gov Payments. 1040ez gov   Enter any federal income tax withheld that is shown on Form W-2, box 2, or Form 1099, box 4, on line 36. 1040ez gov Enter any estimated tax payments you made on line 37. 1040ez gov Credit for child and dependent care expenses. 1040ez gov   If you can take this credit, as discussed in chapter 32, complete Form 2441, Child and Dependent Care Expenses, and attach it to your return. 1040ez gov Enter the amount of the credit on line 29. 1040ez gov The IRS will not figure this credit. 1040ez gov Credit for the elderly or the disabled. 1040ez gov   If you can take this credit, as discussed in chapter 33, the IRS can figure it for you. 1040ez gov Enter “CFE” in the space to the left of line 30 and attach Schedule R (Form 1040A or 1040), Credit for the Elderly or the Disabled, to your paper return. 1040ez gov On Schedule R (Form 1040A or 1040), check the box in Part I for your filing status and age. 1040ez gov Complete Part II and Part III, lines 11 and 13, if they apply. 1040ez gov Earned income credit. 1040ez gov   If you can take this credit, as discussed in chapter 36, the IRS can figure it for you. 1040ez gov Enter “EIC” to the left of the entry space for line 38a. 1040ez gov Enter the nontaxable combat pay you elect to include in earned income on line 38b. 1040ez gov    If you have a qualifying child, you must fill in Schedule EIC (Form 1040A or 1040), Earned Income Credit, and attach it to your paper return. 1040ez gov If you do not provide the child's social security number on Schedule EIC, line 2, the credit will be reduced or disallowed unless the child was born and died in 2013. 1040ez gov   If your credit for any year after 1996 was reduced or disallowed by the IRS, you may also have to file Form 8862 with your return. 1040ez gov For details, see the Form 1040A Instructions. 1040ez gov Form 1040 Line Entries Read lines 1 through 43 and fill in the lines that apply to you. 1040ez gov Do not complete line 44. 1040ez gov If you are filing a joint return, use the space under the words “Adjusted Gross Income” on the front of your return to separately show your taxable income and your spouse's taxable income. 1040ez gov Read lines 45 through 71. 1040ez gov Fill in the lines that apply to you, but do not fill in lines 54, 61, and 72. 1040ez gov Also, do not complete line 55 and lines 73 through 77. 1040ez gov Do not fill in line 53, box “c,” if you are completing Schedule R (Form 1040A or 1040), or line 64a if you want the IRS to figure the credits shown on those lines. 1040ez gov Payments. 1040ez gov   Enter any federal income tax withheld that is shown on Form W-2, box 2, or Form 1099, box 4, on line 62. 1040ez gov Enter any estimated tax payments you made on line 63. 1040ez gov Credit for child and dependent care expenses. 1040ez gov   If you can take this credit, as discussed in chapter 32, complete Form 2441 and attach it to your paper return. 1040ez gov Enter the amount of the credit on line 48. 1040ez gov The IRS will not figure this credit. 1040ez gov Credit for the elderly or the disabled. 1040ez gov   If you can take this credit, as discussed in chapter 33, the IRS can figure it for you. 1040ez gov Enter “CFE” on the line next to line 53, check box “c,” and attach Schedule R (Form 1040A or 1040) to your paper return. 1040ez gov On Schedule R (Form 1040A or 1040), check the box in Part I for your filing status and age. 1040ez gov Complete Part II and Part III, lines 11 and 13, if they apply. 1040ez gov Earned income credit. 1040ez gov   If you can take this credit, as discussed in chapter 36, the IRS can figure it for you. 1040ez gov Enter “EIC” on the dotted line next to Form 1040, line 64a. 1040ez gov Enter the nontaxable combat pay you elect to include in earned income on line 64b. 1040ez gov   If you have a qualifying child, you must fill in Schedule EIC (Form 1040A or 1040), Earned Income Credit, and attach it to your paper return. 1040ez gov If you do not provide the child's social security number on Schedule EIC, line 2, the credit will be reduced or disallowed unless the child was born and died in 2013. 1040ez gov   If your credit for any year after 1996 was reduced or disallowed by the IRS, you may also have to file Form 8862 with your return. 1040ez gov For details, see the Form 1040 Instructions. 1040ez gov Prev  Up  Next   Home   More Online 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1040ez gov 10. 1040ez gov   Business Bad Debts Table of Contents Introduction Topics - This chapter discusses: Useful Items - You may want to see: Definition of Business Bad DebtAccrual method. 1040ez gov Cash method. 1040ez gov Debt acquired from a decedent. 1040ez gov Liquidation. 1040ez gov Types of Business Bad Debts When a Debt Becomes Worthless How To Claim a Business Bad DebtSpecific Charge-Off Method Nonaccrual-Experience Method Recovery of a Bad DebtNet operating loss (NOL) carryover. 1040ez gov Introduction You have a bad debt if you cannot collect money owed to you. 1040ez gov A bad debt is either a business bad debt or a nonbusiness bad debt. 1040ez gov This chapter discusses only business bad debts. 1040ez gov Generally, a business bad debt is one that comes from operating your trade or business. 1040ez gov You can deduct business bad debts on Schedule C (Form 1040) or your applicable business income tax return. 1040ez gov All other bad debts are nonbusiness bad debts and are deductible only as short-term capital losses. 1040ez gov For more information on nonbusiness bad debts, see Publication 550. 1040ez gov Topics - This chapter discusses: Definition of business bad debt When a debt becomes worthless How to claim a business bad debt Recovery of a bad debt Useful Items - You may want to see: Publication 525 Taxable and Nontaxable Income 536 Net Operating Losses (NOLs) for Individuals, Estates, and Trusts 544 Sales and Other Dispositions of Assets 550 Investment Income and Expenses 556 Examination of Returns, Appeal Rights, and Claims for Refund Form (and Instructions) Schedule C (Form 1040) Profit or Loss From Business 1040X Amended U. 1040ez gov S. 1040ez gov Individual Income Tax Return 1045 Application for Tentative Refund 1139 Corporation Application for Tentative Refund 3115 Application for Change in Accounting Method See chapter 12 for information about getting publications and forms. 1040ez gov Definition of Business Bad Debt A business bad debt is a loss from the worthlessness of a debt that was either: Created or acquired in your trade or business, or Closely related to your trade or business when it became partly or totally worthless. 1040ez gov A debt is closely related to your trade or business if your primary motive for incurring the debt is business related. 1040ez gov Bad debts of a corporation (other than an S corporation) are always business bad debts. 1040ez gov Credit sales. 1040ez gov   Business bad debts are mainly the result of credit sales to customers. 1040ez gov Goods that have been sold, but not yet paid for, and services that have been performed, but not yet paid for, are recorded in your books as either accounts receivable or notes receivable. 1040ez gov After a reasonable period of time, if you have tried to collect the amount due, but are unable to do so, the uncollectible part becomes a business bad debt. 1040ez gov   Accounts or notes receivable valued at fair market value (FMV) when received are deductible only at that value, even though the FMV may be less than the face value. 1040ez gov If you purchased an account receivable for less than its face value, and the receivable subsequently becomes worthless, the most you are allowed to deduct is the amount you paid to acquire it. 1040ez gov    You can claim a business bad debt deduction only if the amount owed to you was previously included in gross income. 1040ez gov This applies to amounts owed to you from all sources of taxable income, including sales, services, rents, and interest. 1040ez gov Accrual method. 1040ez gov   If you use the accrual method of accounting, you generally report income as you earn it. 1040ez gov You can only claim a bad debt deduction for an uncollectible receivable if you have previously included the uncollectible amount in income. 1040ez gov   If you qualify, you can use the nonaccrual-experience method of accounting discussed later. 1040ez gov Under this method, you do not have to accrue income that, based on your experience, you do not expect to collect. 1040ez gov Cash method. 1040ez gov   If you use the cash method of accounting, you generally report income when you receive payment. 1040ez gov You cannot claim a bad debt deduction for amounts owed to you because you never included those amounts in income. 1040ez gov For example, a cash basis architect cannot claim a bad debt deduction if a client fails to pay the bill because the architect's fee was never included in income. 1040ez gov Debts from a former business. 1040ez gov   If you sell your business but retain its receivables, these debts are business debts because they arose out of your trade or business. 1040ez gov If any of these receivables subsequently become worthless, the loss is still a business bad debt. 1040ez gov Debt acquired from a decedent. 1040ez gov   The character of a loss from debts of a business acquired from a decedent is determined in the same way as debts acquired on the purchase of a business. 1040ez gov The executor of the decedent's estate treats any loss from the debts as a business bad debt if the debts were closely related to the decedent's trade or business when they became worthless. 1040ez gov Otherwise, a loss from these debts becomes a nonbusiness bad debt for the decedent's estate. 1040ez gov Liquidation. 1040ez gov   If you liquidate your business and some of the accounts receivable that you retain become worthless, they become business bad debts. 1040ez gov Types of Business Bad Debts Business bad debts may result from the following. 1040ez gov Loans to clients and suppliers. 1040ez gov   If you loan money to a client, supplier, employee, or distributor for a business reason and you are unable to collect the loan after attempting to do so, you have a business bad debt. 1040ez gov Debts owed by political parties. 1040ez gov   If a political party (or other organization that accepts contributions or spends money to influence elections) owes you money and the debt becomes worthless, you can claim a bad debt deduction only if all of the following requirements are met. 1040ez gov You use the accrual method of accounting. 1040ez gov The debt arose from the sale of goods or services in the ordinary course of your trade or business. 1040ez gov More than 30% of your receivables accrued in the year of the sale were from sales to political parties. 1040ez gov You made substantial and continuing efforts to collect on the debt. 1040ez gov Loan or capital contribution. 1040ez gov   You cannot claim a bad debt deduction for a loan you made to a corporation if, based on the facts and circumstances, the loan is actually a contribution to capital. 1040ez gov Debts of an insolvent partner. 1040ez gov   If your business partnership breaks up and one of your former partners becomes insolvent, you may have to pay more than your pro rata share of the partnership's debts. 1040ez gov If you pay any part of the insolvent partner's share of the debts, you can claim a bad debt deduction for the amount you paid that is attributable to the insolvent partner's share. 1040ez gov Business loan guarantee. 1040ez gov   If you guarantee a debt that subsequently becomes worthless, the debt can qualify as a business bad debt if all the following requirements are met. 1040ez gov You made the guarantee in the course of your trade or business. 1040ez gov You have a legal duty to pay the debt. 1040ez gov You made the guarantee before the debt became worthless. 1040ez gov You meet this requirement if you reasonably expected you would not have to pay the debt without full reimbursement from the borrower. 1040ez gov You received reasonable consideration for making the guarantee. 1040ez gov You meet this requirement if you made the guarantee in accord with normal business practice or for a good faith business purpose. 1040ez gov Example. 1040ez gov Jane Zayne owns the Zayne Dress Company. 1040ez gov She guaranteed payment of a $20,000 note for Elegant Fashions, a dress outlet. 1040ez gov Elegant Fashions is one of Zayne's largest clients. 1040ez gov Elegant Fashions later defaulted on the loan. 1040ez gov As a result, Ms. 1040ez gov Zayne paid the remaining balance of the loan in full to the bank. 1040ez gov She can claim a business bad debt deduction only for the amount she paid, since her guarantee was made in the course of her trade or business for a good faith business purpose. 1040ez gov She was motivated by the desire to retain one of her better clients and keep a sales outlet. 1040ez gov Deductible in the year paid. 1040ez gov   If you make a payment on a loan you guaranteed, you can deduct it in the year paid, unless you have rights against the borrower. 1040ez gov Rights against a borrower. 1040ez gov   When you make payment on a loan you guaranteed, you may have the right to take the place of the lender. 1040ez gov The debt is then owed to you. 1040ez gov If you have this right, or some other right to demand payment from the borrower, you cannot claim a bad debt deduction until these rights become partly or totally worthless. 1040ez gov Joint debtor. 1040ez gov   If two or more debtors jointly owe you money, your inability to collect from one does not enable you to deduct a proportionate amount as a bad debt. 1040ez gov Sale of mortgaged property. 1040ez gov   If mortgaged or pledged property is sold for less than the debt, the unpaid, uncollectible balance of the debt is a bad debt. 1040ez gov When a Debt Becomes Worthless A debt becomes worthless when there is no longer any chance the amount owed will be paid. 1040ez gov This may occur when the debt is due or prior to that date. 1040ez gov To demonstrate worthlessness, you must only show that you have taken reasonable steps to collect the debt but were unable to do so. 1040ez gov It is not necessary to go to court if you can show that a judgment from the court would be uncollectible. 1040ez gov Bankruptcy of your debtor is generally good evidence of the worthlessness of at least a part of an unsecured and unpreferred debt. 1040ez gov Property received for debt. 1040ez gov   If you receive property in partial settlement of a debt, reduce the debt by the property's FMV, which becomes the property's basis. 1040ez gov You can deduct the remaining debt as a bad debt if and when it becomes worthless. 1040ez gov   If you later sell the property for more than its basis, any gain on the sale is due to the appreciation of the property. 1040ez gov It is not a recovery of a bad debt. 1040ez gov For information on the sale of an asset, see Publication 544. 1040ez gov How To Claim a Business Bad Debt There are two methods to claim a business bad debt. 1040ez gov The specific charge-off method. 1040ez gov The nonaccrual-experience method. 1040ez gov Generally, you must use the specific charge-off method. 1040ez gov However, you may use the nonaccrual-experience method if you meet the requirements discussed later under Nonaccrual-Experience Method . 1040ez gov Specific Charge-Off Method If you use the specific charge-off method, you can deduct specific business bad debts that become either partly or totally worthless during the tax year. 1040ez gov However, with respect to partly worthless bad debts, your deduction is limited to the amount you charged off on your books during the year. 1040ez gov Partly worthless debts. 1040ez gov   You can deduct specific bad debts that become partly uncollectible during the tax year. 1040ez gov Your tax deduction is limited to the amount you charge off on your books during the year. 1040ez gov You do not have to charge off and deduct your partly worthless debts annually. 1040ez gov You can delay the charge off until a later year. 1040ez gov However, you cannot deduct any part of a debt after the year it becomes totally worthless. 1040ez gov Significantly modified debt. 1040ez gov   An exception to the charge-off rule exists for debt which has been significantly modified and on which the holder recognized gain. 1040ez gov For more information, see Regulations section 1. 1040ez gov 166-3(a)(3). 1040ez gov Deduction disallowed. 1040ez gov   Generally, you can claim a partial bad debt deduction only in the year you make the charge-off on your books. 1040ez gov If, under audit, the IRS does not allow your deduction and the debt becomes partly worthless in a later tax year, you can deduct the amount you charged off in that year plus the disallowed amount charged off in the earlier year. 1040ez gov The charge-off in the earlier year, unless reversed on your books, fulfills the charge-off requirement for the later year. 1040ez gov Totally worthless debts. 1040ez gov   If a debt becomes totally worthless in the current tax year, you can deduct the entire amount, less any amount deducted in an earlier tax year when the debt was only partly worthless. 1040ez gov   You do not have to make an actual charge-off on your books to claim a bad debt deduction for a totally worthless debt. 1040ez gov However, you may want to do so. 1040ez gov If you do not and the IRS later rules the debt is only partly worthless, you will not be allowed a deduction for the debt in that tax year because a deduction of a partly worthless bad debt is limited to the amount actually charged off. 1040ez gov See Partly worthless debts, earlier. 1040ez gov Filing a claim for refund. 1040ez gov   If you did not deduct a bad debt on your original return for the year it became worthless, you can file a claim for a credit or refund. 1040ez gov If the bad debt was totally worthless, you must file the claim by the later of the following dates. 1040ez gov 7 years from the date your original return was due (not including extensions). 1040ez gov 2 years from the date you paid the tax. 1040ez gov   If the claim is for a partly worthless bad debt, you must file the claim by the later of the following dates. 1040ez gov 3 years from the date you filed your original return. 1040ez gov 2 years from the date you paid the tax. 1040ez gov You may have longer to file the claim if you were unable to manage your financial affairs due to a physical or mental impairment. 1040ez gov Such an impairment requires proof of existence. 1040ez gov   For details and more information about filing a claim, see Publication 556. 1040ez gov Use one of the following forms to file a claim. 1040ez gov For more information, see the instructions for the applicable form. 1040ez gov Table 10-1. 1040ez gov Forms Used To File a Claim IF you filed as a. 1040ez gov . 1040ez gov . 1040ez gov THEN file. 1040ez gov . 1040ez gov . 1040ez gov Sole proprietor or farmer Form 1040X Corporation Form 1120X S corporation Form 1120S and check box H(4) Partnership Form 1065X if filing on paper or  Form 1065 and check box G(5) if filing electronically Nonaccrual-Experience Method If you use an accrual method of accounting and qualify under the rules explained in this section, you can use the nonaccrual-experience method for bad debts. 1040ez gov Under this method, you do not accrue service related income you expect to be uncollectible. 1040ez gov Because the expected uncollectible amounts are not included in income, these amounts are not later deducted from income. 1040ez gov Generally, you can use the nonaccrual-experience method for accounts receivable for services you performed only if: The services are provided in the fields of accounting, actuarial science, architecture, consulting, engineering, health, law, or the performing arts, or You meet the $5 million gross receipts test for all prior years. 1040ez gov Service related income. 1040ez gov   You can use the nonaccrual-experience method only for amounts earned by performing services. 1040ez gov You cannot use this method for amounts owed to you from activities such as lending money, selling goods, or acquiring receivables or other rights to receive payment. 1040ez gov Gross receipts test. 1040ez gov   To find out if you meet the $5 million gross receipts test for all prior years, you must figure the average annual gross receipts for each prior year. 1040ez gov If your average annual gross receipts for any year exceeds $5 million, you cannot use the non-accural experience method. 1040ez gov   The average annual gross receipts for any year is the average of gross receipts from the year in question and the 2 previous years. 1040ez gov For example, if you were figuring the average annual gross receipts for 2013, you would average your gross receipts for 2011, 2012, and 2013. 1040ez gov Interest or penalty charged. 1040ez gov   Generally, you cannot use the nonaccrual-experience method for amounts due on which you charge interest or a late payment penalty. 1040ez gov However, do not treat a discount offered for early payment as the charging of interest or a penalty if both the following apply. 1040ez gov You otherwise accrue the full amount due as gross income at the time you provide the services. 1040ez gov You treat the discount allowed for early payment as an adjustment to gross income in the year of payment. 1040ez gov Change in accounting method. 1040ez gov   Generally, you must obtain consent to change to a nonaccrual-experience method (other than one of the safe harbor methods) or to change from one method to another. 1040ez gov See Form 3115 and the Instructions for Form 3115 for more information. 1040ez gov Recovery of a Bad Debt If you claim a deduction for a bad debt on your income tax return and later recover (collect) all or part of it, you may have to include all or part of the recovery in gross income. 1040ez gov The amount you include is limited to the amount you actually deducted. 1040ez gov However, you can exclude the amount deducted that did not reduce your tax. 1040ez gov Report the recovery as “Other income” on the appropriate business form or schedule. 1040ez gov See Recoveries in Publication 525 for more information. 1040ez gov Net operating loss (NOL) carryover. 1040ez gov   If a bad debt deduction increases an NOL carryover that has not expired before the beginning of the tax year in which the recovery takes place, you treat the deduction as having reduced your tax. 1040ez gov A bad debt deduction that contributes to a NOL helps lower taxes in the year to which you carry the NOL. 1040ez gov For more information about NOLs, see Publication 536. 1040ez gov Also, see the Instructions for Form 1045, and the Instructions for Form 1139. 1040ez gov Prev  Up  Next   Home   More Online Publications