# 26 U.S.C. § 166: Bad debts Source: OLRC release point 119-134 . Cite pinpoints as 26 U.S.C. § 166(a)(1). ## § 166(a) General rule **§ 166(a)(1) Wholly worthless debts.** There shall be allowed as a deduction any debt which becomes worthless within the taxable year. **§ 166(a)(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. ## § 166(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. ## § 166(c) Repealed. Pub. L. 99–514, title VIII, § 805(a), Oct. 22, 1986, 100 Stat. 2361] ## § 166(d) Nonbusiness debts **§ 166(d)(1) General rule.** In the case of a taxpayer other than a corporation— **§ 166(d)(1)(A)** subsection (a) shall not apply to any nonbusiness debt; and **§ 166(d)(1)(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. **§ 166(d)(2) Nonbusiness debt defined.** For purposes of paragraph (1), the term “nonbusiness debt” means a debt other than— **§ 166(d)(2)(A)** a debt created or acquired (as the case may be) in connection with a trade or business of the taxpayer; or **§ 166(d)(2)(B)** a debt the loss from the worthlessness of which is incurred in the taxpayer’s trade or business. ## § 166(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). ## § 166(f) Cross references **§ 166(f)(1)** For disallowance of deduction for worthlessness of debts owed by political parties and similar organizations, see section 271. **§ 166(f)(2)** For special rule for banks with respect to worthless securities, see section 582. ## Regulations - [Treas. Reg. § 1.166-1](/26/reg/1.166-1.md): Bad debts. (interprets § 166) - [Treas. Reg. § 1.166-2](/26/reg/1.166-2.md): Evidence of worthlessness. (interprets § 166) - [Treas. Reg. § 1.166-3](/26/reg/1.166-3.md): Partial or total worthlessness. (interprets § 166) - [Treas. Reg. § 1.166-4](/26/reg/1.166-4.md): Reserve for bad debts. (interprets § 166) - [Treas. Reg. § 1.166-5](/26/reg/1.166-5.md): Nonbusiness debts. (interprets § 166) - [Treas. Reg. § 1.166-6](/26/reg/1.166-6.md): Sale of mortgaged or pledged property. (interprets § 166) - [Treas. Reg. § 1.166-7](/26/reg/1.166-7.md): Worthless bonds issued by an individual. (interprets § 166) - [Treas. Reg. § 1.166-8](/26/reg/1.166-8.md): Losses of guarantors, endorsers, and indemnitors incurred on agreements made before January 1, 1976. (interprets § 166) - [Treas. Reg. § 1.166-9](/26/reg/1.166-9.md): Losses of guarantors, endorsers, and indemnitors incurred, on agreements made after December 31, 1975, in taxable years beginning after such date. (interprets § 166) - [Treas. Reg. § 1.166-10](/26/reg/1.166-10.md): Reserve for guaranteed debt obligations. (interprets § 166) ## Forms named in the regulations - [Form 3115](https://www.irs.gov/pub/irs-pdf/f3115.pdf) ## Final rules - [84 FR 9231](https://www.federalregister.gov/documents/2019/03/14/2019-03474/eliminating-unnecessary-tax-regulations) (2019): Eliminating Unnecessary Tax Regulations - [63 FR 4394](https://www.federalregister.gov/documents/1998/01/29/98-2093/modifications-of-bad-debts-and-dealer-assignments-of-notional-principal-contracts) (1998): Modifications of Bad Debts and Dealer Assignments of Notional Principal Contracts ## Leading cases - [Thor Power Tool Co. v. Commissioner, 439 U.S. 522 (1979)](https://www.courtlistener.com/opinion/109974/thor-power-tool-co-v-commissioner/) - [United States v. Generes, 405 U.S. 93 (1972)](https://www.courtlistener.com/opinion/108467/united-states-v-generes/) - [In re Lane, 742 F.2d 1311 (11th Cir. 1984)](https://www.courtlistener.com/opinion/440532/in-re-james-a-lane-bankrupt-frances-b-lane-and-james-m-gaines-as/) ## Proposed regulations (not in force) - [Prop. Treas. Reg. § 1.166-2](/26/prop/1.166-2_2023-28589.md): Evidence of worthlessness. (REG-121010-17, proposed 2023-12-28) ## Connections Cites: § 165 Losses; § 271 Debts owed by political parties, etc.; § 582 Bad debts, losses, and gains with respect to securities held by financial institutions; § 1011 Adjusted basis for determining gain or loss Cited by: § 108 Income from discharge of indebtedness; § 271 Debts owed by political parties, etc.; § 582 Bad debts, losses, and gains with respect to securities held by financial institutions; § 585 Reserves for losses on loans of banks; § 593 Reserves for losses on loans; § 1351 Treatment of recoveries of foreign expropriation losses; § 6511 Limitations on credit or refund Derived from: 1939 § 23(k)(1); 1939 § 23(k)(2); 1939 § 23(k)(4), (5); 1939 § 23(k)(6) ## Amendments - 1954-08-16: [Act Aug. 16, 1954, ch. 736](/26/act/1954-ch736.md), 68A Stat. 50 - 1958-09-02: [Pub. L. 85-866](/26/act/85-866.md), 72 Stat. 1608 - 1966-11-02: [Pub. L. 89-722](/26/act/89-722.md), 80 Stat. 1151 - 1969-12-30: [Pub. L. 91-172](/26/act/91-172.md), 83 Stat. 619 - 1976-10-04: [Pub. L. 94-455](/26/act/94-455.md), 90 Stat. 1575 - 1984-07-18: [Pub. L. 98-369](/26/act/98-369.md), 98 Stat. 1011 - 1986-10-22: [Pub. L. 99-514](/26/act/99-514.md), 100 Stat. 2361 - 1988-11-10: [Pub. L. 100-647](/26/act/100-647.md), 102 Stat. 3439