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Collect tax deductions for bad debts

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in Small Business Tax,Small Business Tax Deduction Strategies

Business is bad for many businesses. Worst of all, you may have difficulty collecting payment for products delivered or services already performed.

Strategy: Step up your collection efforts. If you don’t receive payment before year-end, you may be able to deduct the amount as a “bad business debt” on your 2008 return.

Generally, an accrual-basis business can deduct business bad debts to the extent of their worthlessness when they become partially or totally valueless. In contrast, nonbusiness bad debts are treated as short-term losses, which are less valuable. Nonbusiness bad debts are deducted only when they are totally worthless.

Keep detailed records of all attempts to collect payment. This includes letters, phone calls, e-mails and authorizations to collection agencies. You can use the documentation to support the worthlessness of the debts.

Tip: If you choose, you may deduct partially worthless debts next year. But you can’t deduct any part of a bad debt in a year after the year in which it becomes totally worthless.

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