Bad debts that are not business bad debts are non-business bad debts. In order to deduct a bad debt, it must be a real, or genuine, debt. This means there must be a creditor-debtor relationship based on a valid and enforceable obligation to repay a specific sum of money. The loss is considered a short-term capital loss regardless of terms. No deduction for partial worthlessness is allowed. The deduction can only be taken in the year in which it becomes totally worthless. Non-business bad debt is reported as a short-term capital loss on Schedule D. A statement should be attached to the income tax return for each debt documenting a description of the debt, including amount and due date, the name and relationship of the debtor, efforts made to collect the debt and why the debt is deemed to be worthless in the current year.
Loans between family members are treated differently
Loans between family members are subject to additional scrutiny and are generally considered “gifts” unless it can be established that a bona fide loan exists. Evidence of a bona fide loan include a note or other evidence of indebtedness, interest being charged, fixed repayment schedule, security or collateral, demand for repayment, and payments being made. Loans to insolvent family members are considered “gifts” since a reasonable expectation of repayment cannot exist. Individuals often guarantee loans for friends or family members as a personal favor without receiving any consideration. Payments made under these guarantees are considered gifts and cannot lead to a bad debt deduction.
The following is important to remember at year-end. For health insurance premium paid on behalf of a more than 2% S-corporation shareholder to be deductible by the S-corporation, the premium must be reported in box 1 on the shareholder's form W-2. The rules are not straight forward, but the below text should help you determine how to handle health insurance premium.
A 2% S-corporation shareholder is defined as a shareholder of an S-corporation who owns more than 2% of the S-corporation or any other type of entity taxed as an S-corporation. If no wages are reported on the shareholder's form W-2, the health insurance premium paid by the S-corporation on the shareholder's behalf is not deductible by the corporation. You will want to pay wages of at least the amount of health insurance premium paid on behalf of the shareholder.
The health insurance premium amount is deductible on Sch A on your individual income tax return if you choose not to follow the IRS rules. If the health insurance premium paid on behalf of the shareholder is included in box 1 on the W-2, it will be deducted from the front page of form 1040 with a net effect of $0, and THEN it comes through as reduced income from the S-corporation on its Sch K-1. For the shareholder, this is much preferred to the alternative which does not reduce adjusted gross income and is subject to the medical expense limitation.
Bartering is an exchange of property and services. There can be a cash component. Many people like bartering because they find it easier to deal with in terms of cash flow. The fair value of the property and services received are included in income. If you exchanged property or services through a barter exchange, a form 1099-B is issued to indicate the fair value amount received. The property and services given up can be deducted if it is a qualifying business expense. Bartering can become an administrative burden unless you always have equal value barter. Also, many hope that income derived from barter does not need to be reported on their income tax return, but that would be false. Personally, I do not like to barter. It just means more busy work.
Charitable contributions must be made to “qualified organizations” as provided by IRS Publication 526. Remember, you can’t deduct donations to specific individuals or political organizations.
Charitable contributions are deductible only if you itemize deductions using Form 1040, Schedule A.
You can deduct cash contributions and the fair market value of most property you donate. Clothing and household items must be in “good used condition or better” to be deductible.
If your contribution entitles you to receive merchandise, goods, or services, you can deduct the amount exceeding the fair market value of the benefit received.
Only contributions actually made during the tax year are deductible. For example, if you pledged $500 in May but paid the charity only $200 by year-end, you can only deduct $200.
Save a cancelled check, bank or credit card statement, or a dated / written receipt from the charity with the amount of the contribution. For text message donations, keep your phone bill showing the receiving organization, the date and the amount.
Include credit card charges and payments by check in the year you donate to the charity, even if you don’t pay the credit card bill or draft from your bank account until the next year.
For contributions of $250 or more, you need more than a bank record. You need a dated / written receipt from the charity. Stating the dollar amount donated and whether the organization provided goods or services in exchange for the gift. If you donated large items, the receipt must include a description of the items and a good faith estimate of value. For items valued at $500 or more you must complete a Form 8283, Noncash Charitable Contributions, and attach the form to your return. To claim deductions for a contributions of noncash property worth more than $5,000, you must obtain an appraisal and complete Section B of Form 8283 with your return.
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