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Tax Strategies and Business Bad Debts Deduction


Tax strategies and business bad debts deduction. Most people don’t really look forward to filing their tax returns and paying their taxes. As it is, there really is not much to look forward to because it is a tedious process that can take weeks to complete. Some people even have the bad luck to raise the interest of the IRS. Most of these people’s mistakes are not intentional. The problem with most of the is the lack proper tax preparation. And also, in all probably they must have rushed through the filing process. Lack of preparation and attention to detail are the most common faults of people who often get flag by the IRS. Let’s face it. Even if audits are not criminal in nature, they are embarrassing, and distressing events people can do without.

Filing accurate tax returns and paying correct taxes are not impossible with the right preparation and a good head start.

A good head start is important in filing because taxpayers get more lead time to organize and prepare the necessary documents. Even if there are lots of tax software available, it is a wise idea to allot a significant amount of time in reviewing past returns, current returns applications, and tax laws. Tax laws are dynamic; they can be changed or revised between the last tax season and the one coming up. There might be some important things in the revised policies that can affect your returns and deductions.

Pleading ignorance of the new policies are not acceptable to the government and the IRS because everybody is presumed to know the law. Taxpayers are recommended to review their current applications especially if they’ve been audited before. According to the IRS, taxpayers repeating audited mistakes are not uncommon. Speaking of mistakes, “forgetting” additional income sources is the predominant mistake most people make. The IRS also compares issued forms against reported income on the returns for disparity. Still on the issue of disparity and comparison, returns are checked for names and SS numbers so they must mirror those in the SS records. Wrongly issued forms must be returned and reported to the issuer for corrections.

Wrong sums are also common mistakes due to rushing.

Though tax software is usually thought of as a late taxpayer’s savior, early filers can use this software to check their computations. Tax charges can usually be avoided by printing correct sums on returns. Taxpayers are encouraged to file their returns even if their current financial situation makes them unable to pay their taxes. Installment payment is an option that IRS offers. Tax matters are sensitive and can be subjected to random auditing. It is advised that taxpayers keep and file their returns of six years at the very least for reference if ever they are called for auditing. Lastly, since the agency is the one who gets burdened by tax problems, the IRS is open to giving assistance to taxpayers. With proper preparation, filing tax returns can be an easy process.

Business Bad Debts Deduction on Your Taxes

Practically every small business has receivables that it cannot obtain from clients. If your small business doesn’t have any such receivables, consider yourself lucky. For those small businesses that suffer from uncollected receivables, solace can be taken from the fact you can claim a tax deduction.

Bad Debt Tax Deduction

A small business can write-off bad debt losses if it meets nominal requirements. To claim such a tax deduction, the following must be shown:

  1. The existence of a legal relationship between the small business and debtor.
  2. The receivables are worthless; and
  3. The small business suffered an actual loss.

Proving there is a legal relationship between the small business and debtor is simple. You must prove that the debtor has a legal obligation to make the payment. About every business issue invoices or sign contracts with debtors. These documents can be enough to prove the legal relationship. If you are not putting your business relationships in writing, you should begin doing so immediately.

Proving receivables are worthless is slightly more complex.

A small business is required to show that the debt has become both worthless and will remain so. You must also show that you took reasonable steps to collect the receivables, but you are not necessarily required to go to court to meet this requirement. A clear example where you would meet this requirement is if the debtor filed bankruptcy.

While proving that you suffered a loss may sound like the easiest requirement to meet, the issue is a bit more complicated. The Tax Code defines the loss as an amount that is included in your books as income but is never collected. A classic example of such a situation would be a manufacturer that provides products to retailers on credit. The manufacturer can show a real loss if the retailer files bankruptcy.

Unfortunately, there is almost no way to claim a loss if you provide hourly services and use a cash accounting method. The expenditure of time and effort is not considered to be a sustained economic loss by the IRS.

Small businesses suffer all too often from uncollected receivables. If you failed to claim those losses as a tax deduction during your last three tax filing years, you can file an amended tax returns to get a refund.


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