The ‘Double Negative’ Case

http://ustaxcourt.gov/InOpHistoric/PatelMemo.TCM.WPD.pdf

In this case the taxpayer tried to deduct as a business loss the income he expected to receive but did not receive. His description on the return was: “Cost; Refunded + no income. Bankrupt.” Even though this description made me chuckle, I have to admit that it is not uncommon for people to believe fervently that forfeited or lost income is or should be deductible. For example, performing services (for which they normally charge a fee) for free for a charity. Sometimes the client will list the value of the service with their contributions for their personal returns. I can understand why the tax court felt compelled to explain the same rule 6 ways from Sunday because I am always left with the feeling that, no matter how I explain it, the client is still not buying into the concept.

Take aways:

• Business bad debt deductions for uncollected receivables only apply to accrual based taxpayers because they have recognized income at invoicing. Cash basis taxpayers don’t recognize income until the payment is received. If income is not received it is simply never recognized. You can’t deduct it again as a loss.

• Likewise if you perform a service for free you don’t have to report income for it – period – that’s it - the end