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To The Rescue

The IRS can turn your uncollectable business debts into tax deductions.

If you're like most small-business owners, you probably have some outstanding debts on your books that you just can't seem to collect. While they're a drag on your business, the IRS may let you claim them as a tax deduction.

To determine if you have eligible debts, first carefully examine your company's records. Customers who buy from you on credit are probably the most common source of bad debts, but there are other situations that produce bad debts, such as loans to suppliers, clients, employees or distributors.

A less obvious bad debt recognized by the IRS may occur if your business partnership breaks up and one of your former partners declares bankruptcy. If he or she can't pay any of the partnership's debts, you may have to pay more than your share of them. The IRS says when you pay any part of an insolvent partner's share of debt, you may be able to take a bad-debt deduction.

Joan Szabo is a writer in McLean, Virginia, who has reported on tax issues for more than 12 years.

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This article was originally published in the August 1998 print edition of Entrepreneur with the headline: To The Rescue.

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