Level 3

Question

Expense not fulfilled - Bad Debt?

Forum|Forum|2 years ago
January 3, 2024
6 replies
20 views

Hello Community,

I have a client that sent a wire for a deposit for a fishing trip in October (the trip was only for a fun getaway, there was no business being attended to on the trip). Later that month, my client received word that the individual running the business had passed away.

My client now insists that we can take the loss on their 2023 tax return - I've already advised that they cannot do that.

Short of getting an attorney to file a small claim against the businessess assets - is there anything I am not thinking of to recover the lost funds?

Individual

This topic has been closed for replies.

Just-Lisa-Now-

Intuit Community Champion

I dont think an attorney is needed for small claims, but as a tax professional, you shouldnt begiving legal advice anyhow....there no tax losses here.

♪♫•*¨*•.¸¸♥Lisa♥¸¸.•*¨*•♫♪

IRonMaN

Level 15

Out of curiosity, how many dollars are we talking about?

As far as Lisa's point goes, attorneys give out bad tax advice all of the time -------------- what's wrong with a tax preparer giving out bad legal advice once in a while? 😉

Slava Ukraini!

T

taxproDEAuthor

Level 3

$10,500.

IRonMaN

Level 15

Sounds like the guy was probably a good fisherman but sucked at bookkeeping.

Slava Ukraini!

sjrcpa

Level 15

Sole Proprietor? File a claim against the estate.

The more I know the more I don’t know.

T

taxproDEAuthor

Level 3

Not a whole lot of details on the business. I think the assets were all titled in the name of the LLC.

Also, the LLC only holds boats as far as I know.

BobKamman

Level 15

I avoid these questions because my intuitive answer is usually not the right answer. What IRS will tell you (Pub 550) is

Insolvency of contractor. You can take a bad debt deduction for the amount you deposit with a contractor if the contractor becomes insolvent and you are unable to recover your deposit. If the deposit is for work unrelated to your trade or business, it is a nonbusiness bad debt deduction.

"Contractor" conjures an image of an electrician installing a freezer, but why not also the guy who helps you fill the freezer with fish?

In any case, they told you he's dead, and you believed them? At least do a Google search for the obituary. Was the payment made to an individual, or to a business entity? Has the business been sold, or liquidated? If it does qualify as a nonbusiness bad debt, you have to show reasonable efforts to collect it, and that the remaining balance is totally worthless.

And sending them a 1099-C is an admission that it is uncollectible. So I wouldn't do that.

T

taxproDEAuthor

Level 3

This wasn't really a "contractor" - I don't even think the fish caught would've been stored. From what I understand, it was just trophy fishing. Don't you think the position you're taking is a bit, aggressive?

The payment was made to a business. There's nothing on Google about an obituary for the individual; however, I was able to find a court case from a decade ago.

BobKamman

Level 15

If I give you money and you promise to provide a service, that is a contract. "Contractor" covers a lot of ground outside the building trades.

PATAX

Level 12

Not sure if this is relevant but what about contacting the state attorney general or someone similar. I remember years ago there was a bridal shop business or something like this that had financial difficulties and the brides to be or whoever were going to lose their deposits or dresses, but if my memory serves me right, I think the attorney general or someone tried to help them. But I may be wrong.

sjrcpa

Level 15

Or Better Business Bureau for that area?

The more I know the more I don’t know.

qbteachmt

Level 15

OMG, this topic cracks me up.

A nonrefunded deposit is not bad debt, clearly not a business arrangement, and who is leading this parade? Tell him to fly there, sneak in at night, and steal a boat in exchange.

Don't yell at us; we're volunteers

BobKamman

Level 15

@qbteachmt You are listening to your inner voice, but not to this IRS example:

Insolvency of contractor. You can take a bad debt deduction for the amount you deposit with a contractor if the contractor becomes insolvent and you are unable to recover your deposit. If the deposit is for work unrelated to your trade or business, it is a nonbusiness bad debt deduction.

qbteachmt

Level 15

It wasn't for "work" at all. As for any business reference, a 1099c isn't issued for personal. You can make a claim on the estate and the LLC and besides the boats and any equipment, there likely are permits, licenses, and/or certified rights that can be pursued to the new responsible party. It seems there's likely a lot more recourse for this person in real life than in IRC. If it's on a credit card, dispute it.

Don't yell at us; we're volunteers

BobKamman

Level 15

I found this interesting provision in the Regulations under Section 166 (bad debts) –

(2) Specific cases. Subject to any provision of section 166 and the regulations thereunder which provides to the contrary, the following amounts are deductible as bad debts: . . .

(iii) Claim against decedent's estate. The excess of the amount of the claim over the amount received by a creditor of a decedent in distribution of the assets of the decedent's estate may be considered a worthless debt under section 166.

https://www.law.cornell.edu/cfr/text/26/1.166-1

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