A part of any business is bad debt. Tax season rolls around, and it seems as if you'll have to bite the bullet as far as the unpaid loan goes. Not always. If the income that you loaned out was recorded in a previous return then you are eligible to deduct the bad debt from you current income, and in essence get a bad debt tax relief. There are two types of bad debts; a business bad debt and a non-business bad debt. Loans that are issue with monies earned through a business have already been taxed. As such, if the debt becomes bad, you are eligible for tax relief on it. A debt must be a bona fide debt with regard to either type of bad debt. Tax relief for a non-business bad debt cannot be claimed in parts, and the debt must also be considered worthless within one year. You must also establish that you attempted to relieve the debt.