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The IRS audited Tax Year 1, including the issue of the bad debt loss.
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During the audit, the Taxpayer argued the loss should have been deducted as a worthless stock loss rather than a bad debt loss.
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The Revenue Agent allowed the loss, concluding the loss would either be deductible as a bad debt or worthless stock loss. 1 The statute of limitations for assessment under I.
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But that means adding to bad debt reserves or posting a special loss, hurting earnings.
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Two weeks ago, Merrill Lynch warned it would take a 50-cent-a-share loss from exposure to bad debt.
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That shows up on the big hospital chains' profit-and-loss statements, where bad debt levels have almost doubled to 10% of revenue since 2000.
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Similarly, if you claim special deductions and credits, you may need to keep your records a little longer than normal (for example, if you file a claim for a loss from worthless securities or bad debt deduction, you should keep those records for 7 years).
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Sainsbury's said the loss reflected increased provisions for bad customer debt.
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In the case of John Ramig, however, whether his advances to his corporation represented debt or equity would mean the difference between taking an ordinary worthless debt deduction under Section 166 when the debt went bad, or be stuck with a capital loss upon liquidation in some future year.
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To claim a nonbusiness bad debt, you report it as a short-term capital loss subject to the capital loss limitations on a federal form 8949 (downloads as a pdf) in the year the debt becomes worthless.
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