 But in any case, for non-business bad debt, all other bad debts or non-business bad debts are deductible as short-term capital losses on Form 8, 9, 4, 9, Schedule D Form 1040. So you can look there for more detail, but we're focused here on, of course, the business bad debt. If it was a business bad debt, you would think the debt arose from some type of business activity, possibly through providing goods and services. So business bad debt, a business bad debt is a loss from the worthlessness of a debt that was either of the following. One, created or acquired in your business, or two, closely related to your business when it became partly or totally worthless. So a debt is closely related to your business if your primary motive for incurring the debt is a business reason. So why did you take, why did the debt happen? Business, business reason happened. That's why the debt happened. So for example, you might have done work and so they owed you money and there is it is. So business bad debt, bad debts are mainly the result of credit sales to customers. A credit sale meaning not necessarily that they paid you with a credit card. Debt and paying for credit card debt with worse credit card. Card, right? It means that you did work and instead of them paying you at the point in time that you did the work, they're going to pay you in the future. It's an accounts payable kind of transaction. You did work on credit. You've got the bar tab going. You gave them a tab of credit in the future. You sent them for example and invoice. We did the work. Here's the invoice. We expect payment in 30 days or whatever. So they can also be the result of loans to suppliers, clients, employees or distributors. The goods and services. So now we've got a loan that's gonna be a business kind of related to loan to suppliers, clients, employees, distributors. Goods and services that customers have not paid for are shown in your books as either accounts receivable or as notes receivable. So from an accounting standpoint, this would be an accrual thing because if you make sales on account, that means that you're not getting paid at the point you do the sale. So it's not like a restaurant situation. You're not getting paid at the point you do the sale, but rather you have to do the work first like a law firm, accounting firm. You do the work, invoice to client. Then you have to track whether or not they're gonna pay you, which means you usually track that in accounts receivable which by its very nature is an accrual type of thing. And so if you're doing that, you're gonna be on an accrual component. You've recorded the revenue when you did the work, but you hadn't yet received the money. And then of course the question is what if they don't pay you the money in the future? Then you've recorded revenue already and you got to account for the fact that you've recorded revenue in the past, which might be an expense in the future. So if you are unable to collect any part of these accounts or notes receivable, the uncollectible part is a business bad debt caution. You can take a bad debt deduction for these accounts and notes receivable only if the amount you were owed was included in your gross income either for the year the deduction is claimed or for a prior year. That's the point because in an accrual accounting system, you would have recorded the income like if you use QuickBooks or something, when you make an invoice, billing a client or a customer for work done in the past, that's when it records revenue. The revenue is what you're being taxed on. Revenue is bad for taxes. So if in the future they don't pay you the accounts receivable, then you have overstated in essence your revenue in the past paying taxes on it. So that's when you would then be able to possibly get a bad debt expense to compensate for that in the current time period. If you didn't record revenue in the prior period because even though you're tracking accounts receivable, you're still doing a cash based system for some reason somehow, then you wouldn't get an expense to negate the revenue you recorded in the past because you didn't really record the expense because you didn't record the revenue until the point in time that you're gonna receive the cash. Okay, so accrual method. If you use an accrual method of accounting, you normally report income as you earn it. You can take a bad debt deduction for an uncollectable receivable if you have included the uncollectable amount in income. That's what we just talked about. Cash method, however, if you use the cash method of accounting, you normally report income when you receive it. You cannot take a bad debt deduction for amounts owed to you that you have not received and cannot collect if you never included those amounts in income. So again, that would be unusual in a business. Business is business. Where you invoice clients and have to track the accounts receivable, you would most likely be using an accrual method in that case. But if for whatever reason you were using a cash method, even though you're invoicing the client, you would never have recorded the revenue and therefore shouldn't have an expense to negate the revenue because you didn't record the revenue because you never got the cash in the first place. So more information. For more information about business bad debts, you could see chapter 10 of publication 535 if you wanna dive into that in more detail. Notice that the reporting of accounts receivable can be a little bit complex if you just think about it in terms of like accounting methods to report accounts receivable. Small businesses oftentimes will simply be reporting the accounts receivable as the invoice clients. And that's when they'll be reporting revenue and then as the bad debts become due, then you may be able to write them off as bad debt expense when they happen in the future. That's called a direct write-off method from an accounting standpoint. You may also have heard of an allowance method just from an accounting standpoint. And that's a system in which you all have a balance sheet. If you look at the balance sheet, for example, you've got accounts receivable on the balance sheet and you know that some of those accounts receivables aren't gonna be collectible. You don't know which ones aren't, but you can estimate based on prior history that some of them are gonna be bad debt expenses. So you might then think that you should, to properly report your books, come up with some kind of estimate to determine how much of the accounts receivable are uncollectible and how much of the sales that were made in the current timeframe aren't really sales because you're not gonna be able to collect on them and try to record the estimate for the uncollectible portion. And then if you do that method, then you've got an issue that you've gotta say, okay, is there a difference between what I have to do for taxes versus financial reporting? That might be a generally accepted accounting principle thing to do if you are a publicly traded company, for example, and then you gotta think about what you have to do for taxes in that event as well. But for most small businesses, you're gonna be, they enter things for accounts receivable. If they use QuickBooks, for example, when they invoice someone, you record accounts receivable and income is recorded at that point in time. If they're never gonna get paid, if you determine that a receivable is not going to be paid, then the thing to do is typically to write it off to bad debt and that's a direct write-off type of method. So non-business bad debt. All other bad debts or non-business bad debts are deductible as short-term capital losses on form 8, 9, 4, 9, Schedule D. So if you had a bad debt, other than that's not business related to it, then you can take a look at the rules for the Schedule D. So for more information on non-business bad debt, you can see publication 550.