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A cash basis taxpayer prepaid $10,000 to have improvments made to his swimming pool, The contractor only made $2,000 of improvements and then ceased activity, leaving the remainder of the work uncompleted.

I was wondering if this taxpayer can claim a non business bad debt deduction for the amount above the adjusted basis of $2,000?, the only problem is that this doesn't seem like it is a bad debt because it is a prepayment and the debt is not entiely worthless. Can anyone help me??

Thank you,

Nick
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What happened to the contractor, did they skip town or go bankrupt?

Some quick ideas: If the contractor went bankrupt, you may have a bad debt loss, i.e. short-term capital loss treatment. If the contractor skipped town you may have a theft loss, i.e. schedule A (form 1040) loss.



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This loss is not a "bad debt",as the taxpayer did not "loan" the money to the contractor, but paid for services to be rendered. I suppose that there might be an opportunity for a casualty or theft loss deduction from ordinary income- which is deductible first by reducing by $100, then to the extent the the loss exceeds 10% of adjusted gross income. See Internal Revenue Code section 165(h)
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