26 U.S.C. § 166: Bad debts

§ 1.166-1 Bad debts.§ 1.166-2 Evidence of worthlessness.§ 1.166-3 Partial or total worthlessness.§ 1.166-4 Reserve for bad debts.§ 1.166-5 Nonbusiness debts.§ 1.166-6 Sale of mortgaged or pledged property.§ 1.166-7 Worthless bonds issued by an individual.§ 1.166-8 Losses of guarantors, endorsers, and indemnitors incurred on agreements made before January 1, 1976.§ 1.166-9 Losses of guarantors, endorsers, and indemnitors incurred, on agreements made after December 31, 1975, in taxable years beginning after such date.§ 1.166-10 Reserve for guaranteed debt obligations.Prop. § 1.166-2 Proposed 2023 · Evidence of worthlessness.

Amended 1966, 1969, 1976, 1986, 1988

1988 Pub. L. 100-647 Pub. L. 100–647, § 1008(d)(2), made clarifying amendment to directory language of Pub. L. 99–514, § 805(b), see 1986 Amendment note below.
1986 Pub. L. 99-514 Pub. L. 99–514, § 805(b), as amended by Pub. L. 100–647, § 1008(d)(2), redesignated subsec. (g) as (f).
1986 Pub. L. 99-514 Pub. L. 99–514, § 901(d)(4)(A), struck out pars. (3) and (4) which read as follows:
1986 “(3) For special rule for bad debt reserves of certain mutual savings banks, domestic building and loan associations, and cooperative banks, see section 593.
1986 “(4) For special rule for bad debt reserves of banks, small business investment-companies, etc., see sections 585 and 586.”
1976 Pub. L. 94-455 Pub. L. 94–455, § 605(a), redesignated subsecs. (g) and (h) as (f) and (g), respectively.
1969 Pub. L. 91-172 Pub. L. 91–172 added par. (4).
1966 Pub. L. 89-722 Pub. L. 89–722 added subsec. (g) and redesignated former subsec. (g) as (h).

Cases: Thor Power Tool Co. v. Commissioner, 439 U.S. 522 (1979); United States v. Generes, 405 U.S. 93 (1972); In re Lane, 742 F.2d 1311 (11th Cir. 1984)

Forms: Form 3115

Final rules 2

(a) General rule

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(1) Wholly worthless debts There shall be allowed as a deduction any debt which becomes worthless within the taxable year.

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(2) Partially worthless debts When satisfied that a debt is recoverable only in part, the Secretary may allow such debt, in an amount not in excess of the part charged off within the taxable year, as a deduction.

Amended 1976

1976 Pub. L. 94-455 Pub. L. 94–455, § 1906(b)(13)(A), struck out “or his delegate” after “Secretary”.

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(b) Amount of deduction For purposes of subsection (a), the basis for determining the amount of the deduction for any bad debt shall be the adjusted basis provided in section 1011 for determining the loss from the sale or other disposition of property.

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[(c) Repealed. Pub. L. 99–514, title VIII, § 805(a), Oct. 22, 1986, 100 Stat. 2361]

Amended 1976, 1986

1986 Pub. L. 99-514 Pub. L. 99–514, § 805(a), struck out subsec. (c), reserve for bad debts, which read as follows: “In lieu of any deduction under subsection (a), there shall be allowed (in the discretion of the Secretary) a deduction for a reasonable addition to a reserve for bad debts.”
1976 Pub. L. 94-455 Pub. L. 94–455, § 1906(b)(13)(A), struck out “or his delegate” after “Secretary”.

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(d) Nonbusiness debts

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(1) General rule In the case of a taxpayer other than a corporation—

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(A) subsection (a) shall not apply to any nonbusiness debt; and

Amended 1988

1988 Pub. L. 100-647 Pub. L. 100–647, § 1008(d)(1), substituted “subsection (a)” for “subsections (a) and (c)”.

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(B) where any nonbusiness debt becomes worthless within the taxable year, the loss resulting therefrom shall be considered a loss from the sale or exchange, during the taxable year, of a capital asset held for not more than 1 year.

Amended 1976, 1984

1984 Pub. L. 98-369 Pub. L. 98–369 substituted “6 months” for “1 year”, applicable to property acquired after June 22, 1984, and before Jan. 1, 1988. See Effective Date of 1984 Amendment note below.
1976 Pub. L. 94-455 Pub. L. 94–455, § 1401(b)(1)(A), (2), provided that “6 months” would be changed to “9 months” for taxable years beginning in 1977, and “9 months” would be changed to “1 year” for taxable years beginning after Dec. 31, 1977.

(2) Nonbusiness debt defined For purposes of paragraph (1), the term “nonbusiness debt” means a debt other than—

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(A) a debt created or acquired (as the case may be) in connection with a trade or business of the taxpayer; or

Amended 1958

1958 Pub. L. 85-866 Pub. L. 85–866 substituted “a trade or business of the taxpayer” for “a taxpayer’s trade or business”.

(B) a debt the loss from the worthlessness of which is incurred in the taxpayer’s trade or business.

(e) Worthless securities This section shall not apply to a debt which is evidenced by a security as defined in section 165(g)(2)(C).

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(f) Cross references

Amended 1976, 1986, 1988

1988 Pub. L. 100-647 Pub. L. 100–647, § 1008(d)(2), made clarifying amendment to directory language of Pub. L. 99–514, § 805(b), see 1986 Amendment note below.
1986 Pub. L. 99-514 Pub. L. 99–514, § 805(b), as amended by Pub. L. 100–647, § 1008(d)(2), redesignated subsec. (g) as (f) and struck out former subsec. (f) which related to reserve for certain guaranteed debt obligations, par. (1) thereof providing for allowance of deduction, par. (2) disallowing deduction in other cases, par. (3) relating to opening balance of reserve, and par. (4) relating to suspense account.
1976 Pub. L. 94-455 Pub. L. 94–455, §§ 605(a), 1906(b)(13)(A), redesignated subsec. (g) as (f) and struck out “or his delegate” after “Secretary” in pars. (1), (3) and (4)(D). Former subsec. (f), which related to treatment of payments made by guarantors of certain noncorporate obligations, was struck out.

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(1) For disallowance of deduction for worthlessness of debts owed by political parties and similar organizations, see section 271.

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(2) For special rule for banks with respect to worthless securities, see section 582.