Bad Debt Loss

[GTS1101]

I have a client in the construction business. He is a contractor and last year he signed a contract with a women to do a job at her house for 100,000. He purchased all the materials did all the work and the women only paid him 50,000. Towards the end of the job the women got upset and did not want the work to continue. It was almost finished and my client has just a little more to go but the women does not want him to finish. She has all the materials in her house new cabinets, countertops, etc but has only paid half of the contract. My client has threatened to take her to court but has not yet. My client is on the cash basis method. Can he deduct 50,000 as a bad debt business loss or does he have to take her to court first to deem it totally worthless?

GTS1101

[HBurkholder]

You cannot take a bad debt deduction when the taxpayer is on a cash method. He has no basis in the debt, therefore there is nothing to deduct.

[Bird Legs]

Losses

Your client will deduct the cost of the materials that he purchased and in control of the women.

[Luis Mopeo]

To Clarify

You cannot take a bad debt deduction when the taxpayer is on a cash method. He has no basis in the debt, therefore there is nothing to deduct.

Just to clarify, you can take a bad debt deduction on the cash method, but only if you have a basis in the debt, such as loaning cash that you never get back. The above is correct in this situation. You can't take a bad debt for money you never reported as income.