Bad Debts are deductible from gross income in the year the debt becomes worthless.
Business debts are deductible as a Business Expense on Schedule C, Form 1065, or Form 1120. If you guarantee a loan and wind up paying the bill, there's no immediate deduction. To prove a bad debt, you ll have to show that it was a valid debt arising out of a debtor-creditor relationship. The funds you use to make the loan had to come from your income or capital. Finally, you ll have to point to some identifiable event that convinces you the debt is worthless.