Covid-19’s Ravages May Create Significant Opportunities for Companies.
The Coronavirus is reshaping the business landscape and leaving a financial pestilence by laying waste to many companies and businesses. According to the Wall Street Journal “Roughly 140,000 Yelp-listed businesses that had closed since March 1 remained closed on June 15. A large minority of that set, 41%, has shut for good, according to Yelp.” Many businesses that are currently facing reduced revenue are also holding loads of unpaid receipts from customers that have closed their doors. While many business will still have to navigate through the shoals of the pandemic, at least the Internal Revenue Code provides some relief in providing companies and high-income taxpayers with the ability to claim a business bad debt deduction. With proper planning, PMG Intrinsic will assist in helping you identify this valuable tax deduction in uncertain times.
Accrual basis businesses can take an ordinary deduction for the write-off of bad business debt. A debt is determined to be worthless by the particular facts surrounding the instrument. The judicial standard in determining “worthless” is rather subjective, but they tend to rely on the sound business judgment of the taxpayer to determine worthlessness. This is where the counsel of PMG Intrinsic can be invaluable. A bona-fide business debt that becomes worthless may be an ordinary deduction, but a nonbusiness debt would only be treated as a less valuable short-term capital loss.
The deduction is only allowed for any debt that becomes worthless within the tax year when the deduction is taken. Additionally, you may claim a partial worthless bad debt deduction as the receivable became worthless. However, you can also defer the deduction to a later year when the partial worthlessness is more valuable in a later year. This deferral can only last until the debt is completely worthless. For example, if you have a customer that starts to not pay his bills in 2020, and the nonpayment continues into 2021, you may choose to apply the deduction in the later year when you expect the economy to recover. This is advantageous because clients are likely to report more taxable income in 20201 than 2020.
In applying the deduction, PMG Intrinsic’s clients only have to show that reasonable steps were taken to collect the debt, but was unable to do so. Clients have benefited from our counsel to help them surpass this very subjective test. While Covid-19 may have fundamentally changed much of our economic landscape, be assured that PMG Intrinsic will be here to serve you during these times.