A consulting LLC writes off a $14,000 receivable, books a $190 client meal at a sports arena, drives a Ford Transit 18,200 business miles, pays $4,200 interest on a working-capital loan, and buys a $3,800 liability policy. Each deduction lives under a different §162 sub-rule with its own substantiation and timing trap. Miss one and the audit notice picks it off cleanly.
§166 allows a deduction when a bona fide debt becomes wholly or partially worthless during the year. Three preconditions: a creditor-debtor relationship with reasonable expectation of repayment, connection to a trade or business, and prior inclusion in income (accrual) or basis in a loan.
Cash vs accrual mechanic. A cash-basis service provider cannot deduct an uncollected invoice. The income was never recognized, so the "deduction" already occurred by virtue of nonrecognition. An accrual provider that booked the receivable as income may write it off when worthlessness is established.
Charge-off method only. Since TRA 1986, nonfinancial businesses must use the specific charge-off method. The reserve method survives only for certain financial institutions under §585.
Common mistakes
- Treating a cash-basis uncollected invoice as a bad debt. The income was never recognized, so the bad-debt deduction is $0, not the face of the invoice.
- Deducting business meals at 100% in 2025. The temporary restaurant rule expired 12/31/2022. The correct figure is 50%.
- Switching from MACRS actual expense back to standard mileage in year two. The actual-expense election in year one is permanent for that vehicle.
Bottom line
- Business bad debts use the specific charge-off method (§166), deductible only when previously included in income (accrual) or representing loan basis; the reserve method is limited to certain banks (§585).
- Nonbusiness bad debts are short-term capital losses, deductible only when wholly worthless.
- Travel away from home requires an overnight stay; business meals are 50% in 2025 (the 100% restaurant rule expired 12/31/2022); entertainment is fully nondeductible.
- Business gifts are capped at $25 per recipient per year under §274(b); $4 promotional items bearing the company name are excluded from the limit.
Exam shortcut
Meal question in 2025 → halve it. If a stem mentions 100%, only the §274(n)(2) carve-outs (employee comp, public food, holiday parties) qualify. Bad-debt question + cash-basis taxpayer = $0. The income was never on the return; nothing exists to write off. Heavy vehicle alarm: GVWR > 6,000 lbs escapes §280F luxury caps.
The full lesson (about 2,667 words, 18 min read) adds 2 worked examples, all 6 common mistakes, a self-check, free in the app.
Learning objectives
- 2
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