Can a taxpayer take a bad debt deduction for amounts owed that were never included in gross income?
Understand the Problem
The question is seeking to clarify whether a taxpayer is allowed to deduct bad debts that were never part of their gross income. It presents multiple-choice answers that imply different scenarios under which such a deduction may or may not be applicable.
Answer
A taxpayer cannot take a bad debt deduction for amounts not included in gross income.
A taxpayer cannot take a bad debt deduction for amounts owed that were never included in gross income.
Answer for screen readers
A taxpayer cannot take a bad debt deduction for amounts owed that were never included in gross income.
More Information
For a business or individual to claim a bad debt deduction, the debt must have been previously included in their income. If the income was never reported, it cannot be written off as a bad debt.
Tips
One common mistake is to attempt to claim a deduction for potential income that was never reported. Always ensure the debt was previously counted in your income.
Sources
- Topic no. 453, Bad debt deduction | Internal Revenue Service - irs.gov
- Deducting Business Bad Debts - The Tax Adviser - thetaxadviser.com
- Cash or Accrual Basis Reporting Deduction for Bad Debts - finance.lacity.gov
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