Legal Question in Tax Law in California

Re: Tax question

Yes. There could be. Claiming a federal and state tax deduction for a bad debt allows a business to recover at most 40% of the debt through the tax deducion and probably less. If you are able to collect the debt, your recovery may be 100% of the debt, less the cost of collection. Further analysis would come in when you consider settling the debt for something less than 100%.

However, in all events, the tax code requires a taxpayer to attempt to collect the debt before it can be treated as a bad debt.