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Bad Debt? Get a Tax Break

In a troubled economy, every penny counts. So take advantage of these tax savings.

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This story appears in the December 2008 issue of Entrepreneur. Subscribe »

It happens to nearly every business sooner or later: A customer makes a purchase on credit, then never pays up; or a vendor loans a customer money to help keep the customer's business afloat, but the company goes under anyway. The only good thing about bad debts is that you can turn them into a tax break.

First off, the bad debt must be directly related to operating your business, says Frederick W. Daily, author of Tax Savvy for Small Business; nonbusiness bad debts generally aren't tax-deductible. Note that you only take a bad-debt deduction if you previously recorded the amount owed as income received. If you have not previously included the uncollected amount in income, you don't get to deduct the bad debt.

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