Please Identify the: Issue (Describe the tax issue, i.e., the question that you
ID: 2446559 • Letter: P
Question
Please Identify the:
Issue (Describe the tax issue, i.e., the question that you are researching
Conclusion (The answer to the tax question)
Discussion of Reasoning and Authorities
1. Deducting Bad Debt Loss
Last year your client, Barney Bumluck, worked part-time for Timely Tax Return Preparation Service. Barney was promised an hourly wage plus a commission. He worked under this arrangement from early February until April 15. His accrued pay amounted to $900 plus $120 of commissions. When he went to collect his pay, however, he found only a vacant office with a sign on the door reading “Nothing is sure but death and taxes.”
Can Barney take a bad debt deduction for the wages and commission he was unable to collect?
Research Aids: Reg. Section 1.166-1(e)
Explanation / Answer
Barney cannot deduct bad debts for the wages and commission
Reason - The reason being in order to qualify for deduction it should have been included in your income.Since it was not previously reported in his return he cannot claim the expenses as deductible
Sec 1 . 166-1(e) this section deals with the bad debts arising out of unpaid wages, salaries , fees ,rents and similat other item of taxable income .In order to claim deduction under this section the item must be included in the return of income in the year in which such deduction is claimed or in previous year , Barney fulfill none of these conditions hence his bad debt deduction is not deductible.