Question

Under the accrual method, §166 provides that William can claim a bad debt deduction for the account receivable if it is partially or completely uncollectible. Because William does not expect to collect for his services and he has written off the receivable, he is allowed to deduct the full $4,200 of services that he has included in income under the accrual method. What does §166 provide under the accrual method regarding a bad debt deduction for an account receivable?

1) William can claim a bad debt deduction for the account receivable if it is partially uncollectible.
2) William can claim a bad debt deduction for the account receivable if it is completely uncollectible.
3) William cannot claim a bad debt deduction for the account receivable.
4) William can claim a bad debt deduction for the account receivable regardless of its collectibility.

Answer 1

Section 166 allows William to claim a bad debt deduction for an account receivable if it is partially or completely uncollectible, given he has included it in income under the accrual method and determines it is uncollectible.

Step-by-step explanation:

Under §166 of the Internal Revenue Code (IRC), related to the accrual method of accounting, a taxpayer like William can claim a bad debt deduction for an account receivable when it becomes either partially or wholly uncollectible. If William has included the amount in his income previously and has made a reasonable determination that the debt is uncollectible, he is allowed to write it off and claim a deduction. He must have a substantiated and reasonable belief that some or all of the receivables won't be collected.

Therefore, out of the options provided, 1) and 2) are correct as William can claim a bad debt deduction for the account receivable if it is either partially uncollectible or completely uncollectible.