Business taxpayers may be able to claim a bad debt deduction if they meet the criteria. There must be an established good-faith intention to create a debtor-creditor status and an enforceable obligation to pay a set sum. One real estate developer claimed a bad debt deduction for money that he’d advanced to related entities. He did provide promissory notes with a fixed maturity date, dependent on lot sales. But the repayment right was never exercised, no interest payments were made and principal payments were inconsistent. The U.S. Tax Court concluded there was no real expectation of repayment and deemed the advances to be equity. On that basis, the deduction was denied. (TC Memo 2023-86)
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