Bad debt can be written off on both business and non-business income returns. But, there are a number of conditions that must exist for a debt to qualify.
First, whether it is business or non-business, it must be determined that there is no possibility of collecting the amounts owed to you before they can be written off. The IRS does not require a person to wait any specific amount of time, but you are required to take reasonable steps to collect.
Consider, for example, if you sent out an invoice to a client and he died before the due date. Although the debt is not yet in default, you have adequate reason to consider the money unrecoverable.
If the bad debt will be claimed on a business tax return, it must be business related. This means that your primary motive for incurring that debt was relevant to the operation of your business. Examples include, money due for goods or services rendered, debts unrecoverable after the liquidation of a business, or loans made to clients.
To write off a bad debt, you must also have some basis in it. Businesses that report income only once it is earned cannot claim bad debts because the money has not been reported. Likewise, individuals cannot claim bad debts unless the money has already been reported as income or they have already extended the loan. This means you cannot write off a debt for money that you were supposed to get, such as child support or alimony that will not be paid.
If there is money owed to you that you believe cannot be collected, you should contact a lawyer and discuss your bad debt tax write-off options.