Question

A CALENDAR YEAR TAXPAYER SELLS MERCHANDISE FOR 10,000 ON JUNE 1 AND INVOICES THE CUSTOMER. AS OF DECEMBER 31, THE TAXAPYER STILL HAS NOT RECEIVED PAYMENT. UNDER WHAT CIRCUMSTANCES WOULD THE TAXPAYER NOT BE ABLE TO DEUCT THE 10,000 BAD DEBT FOR THE CURRENT YEAR.

REPEATED ATTEMPTS TO COLLECT THE FUNDS THROUGH BILLED INVOICES AND LETTERS

THE TAXPAYER IS A CASH BASIS TAXPAYER

THE TAXPAYER IS AN ACCRUAL BASIS TAXPAYER

THE TAXPAYER KNOW THE CUSTOMER IS IN BANKRUPTCY

Answer 1

Under accrual method of accounting, the taxpayer would be able to record bad debt expense

But under cash basis of accounting expenses cannot be booked on accrual or provisional basis. To book an expense, an actual cash outflow has to happen.

Hence he would not be able to take the benefit of bad debt expense under cash basis