Nolo's Plain-English Law Dictionary

Bad Debt

A debt that can't be collected. A business that is owed a bad debt may deduct it from ordinary income. A lender who made a personal loan that has become a bad debt may deduct it as a short-term capital loss. In some cases, the debtor must claim the amount of the debt as income -- and pay tax on it -- in the year when the business or lender writes off the debt as uncollectable.
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