Recovery of Bad Debt

If you deduct a bad debt and later recover (collect) all or part of it, you may have to include all or part of the recovery in gross income. The amount you include is limited to the amount you actually deducted. However, you can exclude the amount deducted that did not reduce your tax. Report the recovery as "Other income" on the appropriate business form or schedule.

Example. In 1999, the Willow Corporation had gross income of $158,000, a bad debt deduction of $3,500, and other allowable deductions of $49,437. The corporation reported on the accrual method of accounting and used the specific charge-off method for bad debts. The entire bad debt deduction reduced the tax on the 1999 corporate return. In 2000, the corporation recovers part of the $3,500 deducted in 1999. It must include the part recovered in income for 2000 as "Other income" on its corporate return.

Net operating loss (NOL) carryover. If a bad debt deduction increases an NOL carryover that has not expired before the beginning of the tax year in which the recovery takes place, you treat the deduction as having reduced your tax. A bad debt deduction that contributes to a net operating loss helps lower taxes in the year to which you carry the net operating loss.

More information. See Publication 536 for more information about net operating losses. See Recoveries in Publication 525 for more information on recovered amounts.

Sale of property received for debt. If you receive property in partial settlement of a debt and you later sell the property, any gain on the sale is not a recovery of a bad debt. See Property received for debt, earlier.

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