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Do you have a client or customer who won’t pay? Even when all attempts to collect a bad debt have failed, the IRS may give you a break at filing time. Click through to see how to take that bad debt off your taxes.

When can you use bad debt to reduce business income? Even when you take the customer to court and you still don’t get your money, there’s a way to make lemonade from this lemon of a customer.

If your business has already shown this amount as income for tax purposes, you may be able to reduce your business income by the amount of the bad debt. Look at bad debt as an uncollectible account—a receivable owed by a customer, client or patient that you are not able to collect.

Bad debt may be written off at the end of the year if it is determined that the debt is in fact uncollectible.

According to the IRS, bad debt includes:

• Loans to clients and suppliers.
• Credit sales to customers.
• Business loan guarantees.

How do you write off bad debt?

Your business uses the accrual accounting method, showing income when you have billed it, not when you collect it.

If your business operates on a cash accounting basis, you can’t deduct bad debt because you don’t record income until you’ve received the payment. If you don’t get the money, there’s no tax benefit to recording bad debt. You only record the sale when you receive the money from the customer.

Under accrual accounting, manually take the bad debt out of your sales records before you prepare your business tax return.

You must wait until the end of the year, just in case someone pays.

• Prepare an accounts receivable aging report, which shows all the money owed to you by all your customers, how much is owed and how long the amount has been outstanding.
• Total all bad debt for the year, listing all customers who have not paid during the year. Only make this determination at the end of the year and only if you’ve made every effort to collect the money owed to your business.
• Include the bad debt total on your business tax return. If you file business taxes on Schedule C, you can deduct the amount of all bad debt. Each type of business tax return has a place to enter bad debt expenses.

It makes sense in any kind of business—no income recorded, no bad debt.

A business bad debt often originates as a result of credit sales to customers for goods sold or services provided. The best documentation is likely to be a detailed record of collection efforts, indicating you made every effort a reasonable person would in order to collect a debt.

Take some solace by claiming a bad business debt deduction on your tax return. Not exactly a guarantee because you need to show that the debt is worthless, but it’s good to know there may be some relief.

Call our Memphis, TN CPA now at 901-685-9411 to find out how we can decrease your tax obligations. We offer a free initial consultation to new clients so contact us today.

Everyone knows about income taxes and sales taxes, but we tend to forget about excise taxes, because they’re not obvious. Click through for an introduction to this important class of taxes, and see what’s changed.

Excise taxes are paid when purchases are made on specific goods or activities, such as wagering or highway usage by trucks. The producers or merchants pay the tax and typically include the additional tax in the price to the end consumer. Governments levy excise taxes on goods and services that have a high social cost, such as cigarettes, alcohol and gambling. Excise taxes are also referred to as selective sales or differential commodity taxes.

Here are six key facts regarding common, little-known excise taxes —

1. The tax reform bill exempted certain payments made by an aircraft owner or sometimes a lessee, related to the management of private aircraft, from excise taxes imposed on taxable transportation by air.
2. To support the use of alternative fuels, fuel tax credits are allowed on certain types of fuel including the following: biodiesel, including renewable diesel and mixture; alternative fuel credit and mixture; and second-generation biofuel producer.
3. Indoor tanning service providers may need to file a federal excise tax return. These services are subject to a 10 percent excise tax under the Affordable Care Act. This is an example of how excise taxes are often levied on goods and services that are considered unnecessary.
4. Taxpayers who engage in certain specified activities related to excise tax must be registered by the IRS before engaging in the activity. This is known as the 637 registration program. The taxpayer can go online to confirm whether they or a specific company has a valid IRS registration.
5. You may be surprised to know that there is an archery federal excise tax, including the importation and manufacture of archery and fishing products. These, of course, affect relatively few people, but are good examples of how a product or service may be subject to a particular excise tax that is not necessarily obvious.
6. The Environmental Protection Agency’s list of devices to reduce high tractor idling may be exempt from the 12 percent retail excise tax. This shows that a major component of the excise program is motor fuel, and different rates may apply to different types of fuel — gasoline, diesel and gasohol.

The idea is to limit the use of certain products, such as alcohol and tobacco. States also levy excise taxes. Some people say that excise taxes are stopgap measures to solve short-term problems. In fact, some note that discriminatory excises on the consumption of specified products is a step back in development of fiscal systems, postponing a more proper reform for the country or state.

Are you unsure how excise taxes may affect you? Call our Memphis, TN CPA now at 901-685-9411 to find out how we can decrease your tax obligations. We offer a free initial consultation to new clients so contact us today.