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Hr block military Publication 463 - Additional Material Prev  Up  Next   Home   More Online Publications
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Information for the Tax Exempt Bond Community

Update: Effect of Sequestration on Certain State & Local Government Filers of Form 8038-CP
Pursuant to the requirements of the Balanced Budget and Emergency Deficit Control Act of 1985, as amended, certain automatic reductions will take place as of October 1, 2013. These required reductions include a reduction to refundable credits under section 6431 of the Internal Revenue Code applicable to certain qualified bonds.

Published Volume Cap Limit for Tribal Economic Development Bonds
IRS announces the Published Volume Cap Limit for applications for allocations of national bond volume limitation authority to issuers of tribal economic development bonds for the period beginning February 1, 2014.

Extra Time Granted for Tax-Exempt Bond Issuers Affected by Severe Storms and Tornados in Oklahoma
Government entity issuers of tax-exempt bonds affected by the severe storms and tornados occurring in parts of Oklahoma may qualify for additional time to file certain returns related to tax-exempt bonds, qualified tax credit bonds, and specified tax credit bonds.

New Voluntary Closing Agreement Program Request Form
The Internal Revenue Service released the new Form 14429, Tax Exempt Bonds Voluntary Closing Agreement Program Request, which must be submitted with a Tax Exempt Bonds Voluntary Closing Agreement Program submission request.

IRS Report on Avoiding Troubled Tax-Advantaged Bonds
This report produced by the TEB Compliance Practice Research Team seeks to provide aid to issuers of tax-advantaged municipal bonds. It identifies some considerations for issuers of such bonds and is TEB’s initial step toward producing public resource products that assist issuers in avoiding troubled transactions.

Sale of Assets Financed with Tax-Exempt Bonds by State and Local Governments and 501(c)(3) Organizations
Often, in their need to raise funds, state and local governments and 501(c)(3) organizations may sell property financed with tax-exempt bonds. These sales could cause the bond issue to become taxable. This article provides basic information concerning remedial actions needed, if necessary, to preserve the tax-exempt status of the bond issue.

TEGE ACT 11th Report
The eleventh report of recommendations of the Advisory Committee on Tax Exempt and Government Entities (ACT).

ARRA and HIRE Act Bond Guidance
Guidance on bond provisions of the ARRA and HIRE Act.

TEB Post-Issuance Compliance
Provides basic post-issuance information for issuers of tax-advantaged bonds.

TEB Voluntary Compliance
Provides information about post-issuance and voluntary compliance.

TEB Financial Restructuring Compliance
Provides information for issuers or conduit borrowers with defaulted or distressed obligations.

TEB Archives
Past articles and information on Tax Exempt Bonds topics.

Contact TEB
If you need to contact Tax Exempt Bonds this page will provide you with contact information.

TEB Published Guidance
Information and guidance for the Tax Exempt Bond Community.

TEB FAQs
Frequently Asked Questions about Tax Exempt Bond topics.

Page Last Reviewed or Updated: 26-Mar-2014

The Hr Block Military

Hr block military 10. Hr block military   Business Bad Debts Table of Contents Introduction Topics - This chapter discusses: Useful Items - You may want to see: Definition of Business Bad DebtAccrual method. Hr block military Cash method. Hr block military Debt acquired from a decedent. Hr block military Liquidation. Hr block military 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. Hr block military Introduction You have a bad debt if you cannot collect money owed to you. Hr block military A bad debt is either a business bad debt or a nonbusiness bad debt. Hr block military This chapter discusses only business bad debts. Hr block military Generally, a business bad debt is one that comes from operating your trade or business. Hr block military You can deduct business bad debts on Schedule C (Form 1040) or your applicable business income tax return. Hr block military All other bad debts are nonbusiness bad debts and are deductible only as short-term capital losses. Hr block military For more information on nonbusiness bad debts, see Publication 550. Hr block military 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. Hr block military S. Hr block military 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. Hr block military 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. Hr block military A debt is closely related to your trade or business if your primary motive for incurring the debt is business related. Hr block military Bad debts of a corporation (other than an S corporation) are always business bad debts. Hr block military Credit sales. Hr block military   Business bad debts are mainly the result of credit sales to customers. Hr block military 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. Hr block military 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. Hr block military   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. Hr block military 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. Hr block military    You can claim a business bad debt deduction only if the amount owed to you was previously included in gross income. Hr block military This applies to amounts owed to you from all sources of taxable income, including sales, services, rents, and interest. Hr block military Accrual method. Hr block military   If you use the accrual method of accounting, you generally report income as you earn it. Hr block military You can only claim a bad debt deduction for an uncollectible receivable if you have previously included the uncollectible amount in income. Hr block military   If you qualify, you can use the nonaccrual-experience method of accounting discussed later. Hr block military Under this method, you do not have to accrue income that, based on your experience, you do not expect to collect. Hr block military Cash method. Hr block military   If you use the cash method of accounting, you generally report income when you receive payment. Hr block military You cannot claim a bad debt deduction for amounts owed to you because you never included those amounts in income. Hr block military 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. Hr block military Debts from a former business. Hr block military   If you sell your business but retain its receivables, these debts are business debts because they arose out of your trade or business. Hr block military If any of these receivables subsequently become worthless, the loss is still a business bad debt. Hr block military Debt acquired from a decedent. Hr block military   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. Hr block military 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. Hr block military Otherwise, a loss from these debts becomes a nonbusiness bad debt for the decedent's estate. Hr block military Liquidation. Hr block military   If you liquidate your business and some of the accounts receivable that you retain become worthless, they become business bad debts. Hr block military Types of Business Bad Debts Business bad debts may result from the following. Hr block military Loans to clients and suppliers. Hr block military   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. Hr block military Debts owed by political parties. Hr block military   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. Hr block military You use the accrual method of accounting. Hr block military The debt arose from the sale of goods or services in the ordinary course of your trade or business. Hr block military More than 30% of your receivables accrued in the year of the sale were from sales to political parties. Hr block military You made substantial and continuing efforts to collect on the debt. Hr block military Loan or capital contribution. Hr block military   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. Hr block military Debts of an insolvent partner. Hr block military   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. Hr block military 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. Hr block military Business loan guarantee. Hr block military   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. Hr block military You made the guarantee in the course of your trade or business. Hr block military You have a legal duty to pay the debt. Hr block military You made the guarantee before the debt became worthless. Hr block military You meet this requirement if you reasonably expected you would not have to pay the debt without full reimbursement from the borrower. Hr block military You received reasonable consideration for making the guarantee. Hr block military You meet this requirement if you made the guarantee in accord with normal business practice or for a good faith business purpose. Hr block military Example. Hr block military Jane Zayne owns the Zayne Dress Company. Hr block military She guaranteed payment of a $20,000 note for Elegant Fashions, a dress outlet. Hr block military Elegant Fashions is one of Zayne's largest clients. Hr block military Elegant Fashions later defaulted on the loan. Hr block military As a result, Ms. Hr block military Zayne paid the remaining balance of the loan in full to the bank. Hr block military 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. Hr block military She was motivated by the desire to retain one of her better clients and keep a sales outlet. Hr block military Deductible in the year paid. Hr block military   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. Hr block military Rights against a borrower. Hr block military   When you make payment on a loan you guaranteed, you may have the right to take the place of the lender. Hr block military The debt is then owed to you. Hr block military 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. Hr block military Joint debtor. Hr block military   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. Hr block military Sale of mortgaged property. Hr block military   If mortgaged or pledged property is sold for less than the debt, the unpaid, uncollectible balance of the debt is a bad debt. Hr block military When a Debt Becomes Worthless A debt becomes worthless when there is no longer any chance the amount owed will be paid. Hr block military This may occur when the debt is due or prior to that date. Hr block military To demonstrate worthlessness, you must only show that you have taken reasonable steps to collect the debt but were unable to do so. Hr block military It is not necessary to go to court if you can show that a judgment from the court would be uncollectible. Hr block military Bankruptcy of your debtor is generally good evidence of the worthlessness of at least a part of an unsecured and unpreferred debt. Hr block military Property received for debt. Hr block military   If you receive property in partial settlement of a debt, reduce the debt by the property's FMV, which becomes the property's basis. Hr block military You can deduct the remaining debt as a bad debt if and when it becomes worthless. Hr block military   If you later sell the property for more than its basis, any gain on the sale is due to the appreciation of the property. Hr block military It is not a recovery of a bad debt. Hr block military For information on the sale of an asset, see Publication 544. Hr block military How To Claim a Business Bad Debt There are two methods to claim a business bad debt. Hr block military The specific charge-off method. Hr block military The nonaccrual-experience method. Hr block military Generally, you must use the specific charge-off method. Hr block military However, you may use the nonaccrual-experience method if you meet the requirements discussed later under Nonaccrual-Experience Method . Hr block military 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. Hr block military However, with respect to partly worthless bad debts, your deduction is limited to the amount you charged off on your books during the year. Hr block military Partly worthless debts. Hr block military   You can deduct specific bad debts that become partly uncollectible during the tax year. Hr block military Your tax deduction is limited to the amount you charge off on your books during the year. Hr block military You do not have to charge off and deduct your partly worthless debts annually. Hr block military You can delay the charge off until a later year. Hr block military However, you cannot deduct any part of a debt after the year it becomes totally worthless. Hr block military Significantly modified debt. Hr block military   An exception to the charge-off rule exists for debt which has been significantly modified and on which the holder recognized gain. Hr block military For more information, see Regulations section 1. Hr block military 166-3(a)(3). Hr block military Deduction disallowed. Hr block military   Generally, you can claim a partial bad debt deduction only in the year you make the charge-off on your books. Hr block military 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. Hr block military The charge-off in the earlier year, unless reversed on your books, fulfills the charge-off requirement for the later year. Hr block military Totally worthless debts. Hr block military   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. Hr block military   You do not have to make an actual charge-off on your books to claim a bad debt deduction for a totally worthless debt. Hr block military However, you may want to do so. Hr block military 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. Hr block military See Partly worthless debts, earlier. Hr block military Filing a claim for refund. Hr block military   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. Hr block military If the bad debt was totally worthless, you must file the claim by the later of the following dates. Hr block military 7 years from the date your original return was due (not including extensions). Hr block military 2 years from the date you paid the tax. Hr block military   If the claim is for a partly worthless bad debt, you must file the claim by the later of the following dates. Hr block military 3 years from the date you filed your original return. Hr block military 2 years from the date you paid the tax. Hr block military You may have longer to file the claim if you were unable to manage your financial affairs due to a physical or mental impairment. Hr block military Such an impairment requires proof of existence. Hr block military   For details and more information about filing a claim, see Publication 556. Hr block military Use one of the following forms to file a claim. Hr block military For more information, see the instructions for the applicable form. Hr block military Table 10-1. Hr block military Forms Used To File a Claim IF you filed as a. Hr block military . Hr block military . Hr block military THEN file. Hr block military . Hr block military . Hr block military 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. Hr block military Under this method, you do not accrue service related income you expect to be uncollectible. Hr block military Because the expected uncollectible amounts are not included in income, these amounts are not later deducted from income. Hr block military 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. Hr block military Service related income. Hr block military   You can use the nonaccrual-experience method only for amounts earned by performing services. Hr block military 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. Hr block military Gross receipts test. Hr block military   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. Hr block military If your average annual gross receipts for any year exceeds $5 million, you cannot use the non-accural experience method. Hr block military   The average annual gross receipts for any year is the average of gross receipts from the year in question and the 2 previous years. Hr block military For example, if you were figuring the average annual gross receipts for 2013, you would average your gross receipts for 2011, 2012, and 2013. Hr block military Interest or penalty charged. Hr block military   Generally, you cannot use the nonaccrual-experience method for amounts due on which you charge interest or a late payment penalty. Hr block military However, do not treat a discount offered for early payment as the charging of interest or a penalty if both the following apply. Hr block military You otherwise accrue the full amount due as gross income at the time you provide the services. Hr block military You treat the discount allowed for early payment as an adjustment to gross income in the year of payment. Hr block military Change in accounting method. Hr block military   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. Hr block military See Form 3115 and the Instructions for Form 3115 for more information. Hr block military 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. Hr block military The amount you include is limited to the amount you actually deducted. Hr block military However, you can exclude the amount deducted that did not reduce your tax. Hr block military Report the recovery as “Other income” on the appropriate business form or schedule. Hr block military See Recoveries in Publication 525 for more information. Hr block military Net operating loss (NOL) carryover. Hr block military   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. Hr block military A bad debt deduction that contributes to a NOL helps lower taxes in the year to which you carry the NOL. Hr block military For more information about NOLs, see Publication 536. Hr block military Also, see the Instructions for Form 1045, and the Instructions for Form 1139. Hr block military Prev  Up  Next   Home   More Online Publications