I find myself with a couple of deadbeat customers. I had just chalked it up as a loss in my head but then someone suggested there might be some tax benefits that I could gain by reporting this loss of income. I have read that in most cases a cash business can't claim the loss of non-payment of invoices for services rendered. This is most of my claim. I invoiced them and they did not pay. So am I correct that I can't claim this as a loss? ====> it depends. SiNce you end up with a deadbeat client refusing to pay you, you can at least deduct the amount you?re owed from your taxes as a bad debt. however, it is not very easy to claim it. There are 3 requirements that must be satisfied to deduct a bad business debt. For example,You must be able to show that:the debt is a bona fide business debt;it is a worthless debt, and you suffered an economic loss.
If you are self-employed and sell personal services, you will be able to satisfy the first two requirements with most business debts. The problem will be showing the third. You are not automatically entitled to deduct a debt because the obligation has become worthless. To get a deduction, you must have suffered an economic loss. According to the IRS, you have a loss only when you have already reported the money owed as business income;you paid out cash, oryou made credit sales of inventory that were not paid for. Unfortunately, if, like most self-employed people, you?re a cash basis taxpayer who sells services to your clients, you don?t report income until you actually receive it. As a result, you don?t have an economic loss in the eyes of the IRS when a client fails to pay. Thus, you can?t claim a bad debt deduction if a client fails to pay you.
? One company has filed bankruptcy the other is out of money and about to go out of business. Now what about expenses. While with this company I used my personal credit card and filed expense reports with the expectation of reimbursements for those expenses. They did not pay that either. Can I file these as a loss? If so how?=====> To prove your intention of operating a business, despite a lack of income, you need to not only keep good records of the expenses you claim, but any documentation that supports the deduction as necessary to conduct your business. Examples of records that may prove useful include calendars and datebooks that show the amount of time you spent on business activities, and the kinds of tasks you did in an attempt to make your business profitable. Examples of other businesses in your field that had a slow start but were eventually profitable would be helpful, as would copies of ads you took out, your business plan and anything else that shows an intent to make a profit from the business. Even without income, you may be able to deduct your expenses, as long as you meet certain IRS guidelines. Your business loss can offset other income on your tax return and lower your overall tax bill. The IRS presumes you are conducting a business, rather than a hobby, if you report a profit in 3out of the previous 5years. So you could operate your first 2years without a profit, though no income at all in2 years might cause auditors to take a closer look. But even if you show no profit for several years in a row, the IRS may allow your deductions if you can show other evidence that you are conducting a business. For instance, if you conduct your affairs in a business-like manner and devote time and effort toward making the business profitable, if you?ve made a profit in similar activities in the past, if you are trying to make a living and support yourself with the business, or if your failure to bring in income is due to circumstances beyond your control, the IRS may acknowledge that you are conducting a true business and allow your business expense deductions. You can use your business loss to reduce your AGI, subtracting the amount of the loss from income you realize from investments, paid employment or another business you operate. If you don?t have any taxable income, you can?t use the loss from your business to generate a refund. If your loss exceeds your income from other sources, you can only deduct up to the amount of your income. You can, however, carry over the excess loss and apply it to the subsequent year?s tax bill.
To complicate matters the expenses were in a prior year=====you may claim biz related expenses when they were incurred so on your last year?s returns.