26 U.S.C. § 166 — Bad debts

submitted 72 years ago by ch. 736 to r/title-26-INTERNAL-REVENUE-CODE · 305 words · no verdicts yet

in plain englishAI-generated · not legal advice

Taxpayers can deduct debts that become fully worthless during the year, or the written-off part of a partly worthless debt. Non-corporate taxpayers treat a worthless personal (non-business) debt as a short-term capital loss instead of an ordinary deduction. This section doesn't apply to worthless securities, which are covered elsewhere.

(a) General rule. (1) A debt that becomes completely worthless during the tax year can be deducted in full. (2) If the Secretary is satisfied that a debt is only partly recoverable, the Secretary may allow a deduction for the part written off during the year. (b) Amount of deduction. The deduction is based on the debt's adjusted basis under section 1011 — the same figure used to measure a loss from selling the property. (c) [Repealed by Public Law 99-514, October 22, 1986.] (d) Nonbusiness debts. (1) For a taxpayer other than a corporation: subsection (a) does not apply to a "nonbusiness debt"; instead, when such a debt becomes worthless during the year, the loss is treated as a short-term capital loss — as if a capital asset held for one year or less had been sold. (2) A "nonbusiness debt" is any debt except one created or bought in connection with the taxpayer's trade or business, or one whose worthlessness loss happens in the taxpayer's trade or business. (e) Worthless securities. This section does not apply to a debt that is a "security," as defined in section 165(g)(2)(C). (f) Cross references. See section 271 for the rule disallowing deductions for worthless debts owed by political parties and similar organizations. See section 582 for the special rule on banks and worthless securities.

the actual law source: uscode.house.gov ↗public domain

(a) General rule

(1) Wholly worthless debts

There shall be allowed as a deduction any debt which becomes worthless within the taxable year.

(2) Partially worthless debts

When satisfied that a debt is recoverable only in part, the Secretary may allow such debt, in an amount not in excess of the part charged off within the taxable year, as a deduction.

(b) Amount of deduction

For purposes of subsection (a), the basis for determining the amount of the deduction for any bad debt shall be the adjusted basis provided in section 1011 for determining the loss from the sale or other disposition of property.

[(c) Repealed. Pub. L. 99–514, title VIII, § 805(a), Oct. 22, 1986, 100 Stat. 2361]

(d) Nonbusiness debts

(1) General rule

In the case of a taxpayer other than a corporation—

(A)

subsection (a) shall not apply to any nonbusiness debt; and

(B)

where any nonbusiness debt becomes worthless within the taxable year, the loss resulting therefrom shall be considered a loss from the sale or exchange, during the taxable year, of a capital asset held for not more than 1 year.

(2) Nonbusiness debt defined

For purposes of paragraph (1), the term “nonbusiness debt” means a debt other than—

(A)

a debt created or acquired (as the case may be) in connection with a trade or business of the taxpayer; or

(B)

a debt the loss from the worthlessness of which is incurred in the taxpayer’s trade or business.

(e) Worthless securities

This section shall not apply to a debt which is evidenced by a security as defined in section 165(g)(2)(C).

(f) Cross references

(1)

For disallowance of deduction for worthlessness of debts owed by political parties and similar organizations, see section 271.

(2)

For special rule for banks with respect to worthless securities, see section 582.

Source credit: (Aug. 16, 1954, ch. 736, 68A Stat. 50; Pub. L. 85–866, title I, § 8, Sept. 2, 1958, 72 Stat. 1608; Pub. L. 89–722, § 1(a), Nov. 2, 1966, 80 Stat. 1151; Pub. L. 91–172, title IV, § 431(c)(1), Dec. 30, 1969, 83 Stat. 619; Pub. L. 94–455, title VI, § 605(a), title XIV, § 1402(b)(1)(A), (2), title XIX, § 1906(b)(13)(A), Oct. 4, 1976, 90 Stat. 1575, 1731, 1732, 1834; Pub. L. 98–369, div. A, title X, § 1001(b)(1), (e), July 18, 1984, 98 Stat. 1011, 1012; Pub. L. 99–514, title VIII, § 805(a), (b), title IX, § 901(d)(4)(A), Oct. 22, 1986, 100 Stat. 2361, 2379; Pub. L. 100–647, title I, § 1008(d)(1), (2), Nov. 10, 1988, 102 Stat. 3439.)

history & why it existsrecord from the source credit

1954Enacted · Act of Aug. 16, 1954, ch. 736
1958Amended · Pub. L. 85-866 · 72 Stat. 1608
1966Amended · Pub. L. 89-722 · 80 Stat. 1151
1969Amended · Pub. L. 91-172 · 83 Stat. 619
1976Amended · Pub. L. 94-455 · 90 Stat. 1575, 1731, 1732, 1834
1984Amended · Pub. L. 98-369 · 98 Stat. 1011, 1012
1986Amended · Pub. L. 99-514 · 100 Stat. 2361, 2379
1988Amended · Pub. L. 100-647 · 102 Stat. 3439

A history note hasn’t been published yet. The record shows enactment by ch. 736 on 1954-08-16.

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