Writing off Bad Business Debt?

Question

I entered into a contract for sale with a tenant back in 2005.  In Dec 2006, I had contract drawn up and buyer claimed he had placed a deposit in escrow, as well as signing his copy of the contract.  In 90+ e-mails, we discuss the terms of the contract, and he states he received the finalized contract, signed it and mailed it back (I was working in a different state at the time).  Of course, signed contract never arrives, and I eventually lost the property to foreclosure.  My gripe at the time is that I stopped entertaining other offers for rent or purchase on his word.

I now know to check criminal history too, I would have found out this guy served 2 years for bank fraud in TX and had a history of running up credit on businesses and filing BK.

Several attorneys advised me I would probably win the case hands down (b/c of the e-mails and his prison record), but it would be in the neighborhood of 20K to recover my loss (about 50K).  The statute of limitations of breach of contract ran out this past December; I want to know can I write off the loss as uncollectible business debt this year, and could it carry over into future years?

I have sucessfully written off a judgment before as uncollectible debt, do I need a judgment in this case?

PS-all I will say is this gentleman is one of the biggest night club owners in Vegas; he's broke as can be, but puts on a great front!

Bill Walston · Answer

William Hall  I'm afraid you're out of luck.  Bill Gulley is correct when he says "bad debts must have been earned."  This means that in order for you  to deduct a bad debt, you must have previously included the amount in your income or loaned out your cash.   That didn't happen here.  You have no basis for a write off.

Bill Gulley · Answer

Bad debts must have been earned, since you had no contract there is no earned income that was not paid, his breach means there was no deal. So, IMO, no. But, if the property was in a business, you still have the expenses related to the property, but not damages as they were not sought nor awarded. :(

Steven Hamilton II · Answer

Bill Gulley and Bill Walston put it perfectly.

-Steven

William Hall · Answer

Well gentlemen, I thank all of you for chiming in.  I just chalk this up to a very expensive lesson!

Wayne Brooks · Answer

I bow to the CPA's, but even I'm sure "loss of potential profit", without a judgement, isn't tax deductible.

William Hall · Answer

Bill, first of all, thank you for your response.  The atty's I talked to (2 civilian, 1 military) all concurred that there was a contract in place, based on the amount of e-mails regarding negotiation, and the e-mail stating his acceptance of the final offer, and also stating he signed, returned, and mailed said contract, along with opening escrow.

At the time, I couldn't afford to cough up 20K to sue, but the atty's also concurred that I would be entitled to the agreed sales price (555K) minus my purchase price plus business expenses (approx 500K).  Also, at the time, investment properties were my main livelihood; it  was a business purchase/asset of my full-time occupation.  I won't put so many eggs in one basket in the future!

Writing off Bad Business Debt?

Most Popular Reply