Question

In year 1, taxpayer deducted as a bad debt loss a $1,000 receivable from a customer when it appeared the amount would never be collected. In year 2, the customer paid $800 on the receivable.

what would happen if taxable income was $10,000? ($10,000)? $500?

Answer 1

In year 2, the customer's payment of $800 on the previously deducted bad debt of $1,000 would be considered a recovery. The taxpayer will need to include the $800 as income and calculate the additional tax liability based on the tax rate applicable to the increased taxable income.

Step-by-step explanation:

In year 1, the taxpayer deducted a $1,000 receivable from a customer as a bad debt loss since it appeared that the amount would not be collected. In year 2, the customer paid $800 on the receivable. Since the taxpayer had previously deducted the full $1,000 in year 1, the payment of $800 in year 2 would be considered as a recovery of the bad debt. The taxpayer would need to include the $800 as income in year 2.

If the taxable income was $10,000, including the $800 recovery as income would increase the taxable income to $10,800. This would result in additional tax liability based on the tax rate applicable to the taxable income. The exact amount of additional tax would depend on the applicable tax rate and the tax schedule.

For example, if the tax rate is $0.15 for the applicable income bracket, the additional tax liability would be $0.15 multiplied by the $800 recovery, which equals $120. Therefore, the taxpayer's taxable income would increase to $10,800 and the additional tax liability would be $120.