Ashley is an attorney who specializes in family law. She uses the cash method of

Question

Ashley is an attorney who specializes in family law. She uses the cash method of accounting and is a calendar-year taxpayer. Last year, she represented a client in a lawsuit and billed the client $5,000 for her services. Although she made repeated attempts, Ashley was unable to collect the outstanding receivable. Finally, in November of the current year, she finds out that the individual has moved without leaving any forwarding address. Ashley’s attempts to locate the individual are futile.

What is the amount, if any, of the deduction that she may claim in connection with this bad debt?

Explanation / Answer

Answer:

In cash basis accouning, income and expenses is recorded as on when it is received and paid on cash.

To be able to deduct a bad debt, it must have been previously included the amount in your income or loaned out. But in cash basis accounting as the bill has not yet been accounted as the payment for it has not yet been received. So she can not claim any deduction in respect of the bad debt.

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