Worthless debt refers to a financial obligation that is deemed uncollectible. This typically occurs when a debtor is unable to pay back the owed amount, making the debt effectively worthless. For tax purposes, individuals and businesses can claim worthless debts as deductions in the year they become uncollectible, as outlined in federal tax law.
This term is commonly used in tax law and financial contexts. It applies to both individuals and businesses who may have lent money or extended credit. When filing taxes, claiming a worthless debt can reduce taxable income, which is particularly relevant in civil law cases involving collections or bankruptcy. Users can manage this process with legal templates available through resources like US Legal Forms.
Here are a couple of examples of abatement:
Example 1: A small business lends $10,000 to a client who subsequently files for bankruptcy. After assessing the situation, the business determines that the debt is uncollectible and claims it as a worthless debt on their taxes.
Example 2: An individual lends money to a friend who then disappears without repaying the loan. After exhausting all collection efforts, the individual can classify this debt as worthless for tax purposes. (hypothetical example)
The primary statute governing worthless debts is found in the Internal Revenue Code, specifically 26 USCS § 166, which allows taxpayers to deduct bad debts that become worthless within the taxable year. Additionally, relevant case law includes Roth Steel Tube Co. v. Commissioner, which provides guidance on how worthless debts are treated for tax purposes.
| Term | Definition | Difference |
|---|---|---|
| Bad Debt | A debt that is unlikely to be collected. | Worthless debt is specifically uncollectible within the taxable year, while bad debt may still have some potential for recovery. |
| Charge-Off | A declaration that a debt is unlikely to be collected. | A charge-off is an accounting action, while worthless debt is a tax deduction. |
If you believe you have a worthless debt, first document your collection efforts. Then, consult the IRS guidelines on claiming bad debts as deductions. Consider using legal templates from US Legal Forms to assist in the process. If the situation is complex, seeking advice from a tax professional or attorney may be beneficial.
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A worthless debt is one that you have made reasonable efforts to collect but cannot recover, and it must be claimed in the year it becomes uncollectible.