The Pensacola journal. (Pensacola, Fla.) 1898-1985, 1922-02-05
INCOME TAX FACTS
BY Ad Carter

The revenue act OF 1921 contains two
new and important provisions with re-
spect to deductions for bad debts.
Debts ascertained to be worthless and
charged off during the year 1921 may
be deducted, and when satisfied that a
debt is recoverable only in part, the
commissioner of internal revenue may
allow such debt to be charged off in
part.
Where a taxpayer, as a matter of
established business practice, sets up
annually a reserve for bad debts, based
upon experience, reasonable additions
I, to such reserve during the year, with
in the discretion of the commissioner
may be deducted. In such a case debts
written off the books of the taxpayer
must be charged against the reserve,
and NUTS not be claimed as a deduC-
ton from gross income.
Before deductiIg a debt in part, a
I taxpayer must be able to show with n
reasonable degree Of certainty the
amount uncoIlectible. In determining
whether a debt is worthless in whole
or in part, the commissioner will con-
slider pertinent evidence, such as the
value of collateral. If any, and the fl
nancial condition of the debtor. Partial
deductions will not be allowed with re-
spect to specific debts only.
Reserve Accounts.
Taxpayers, who prior to 1921. have
maintained reserve accounts for hid
debts may deduct a reasonable addi-
ton to such reser. es during the last
year in lieu of deduction for specific
no
heretofore maintained such reserve &C
counts, may now elect to do so. In such
case they may determine the amount
that reasonably should have been set
up at December so, 1920 (Which sum
shall not be deducted in computing net
income). and for 1921 and subsequent
years, may add a reasonable addition
to such reserve, and deduct the amount
when computing net income. What
constitutes such reasonable addition"
nuts be determined in the light Of
facts, and viii vary as between classes
of business, and with conditions OF
business prosperity. Specific items of
bad debts ascertained to be worthless
should be charged against the reserve
fun, and not deducted from gross in
come.
\ taxpayer using the reserve method
should include in his return a state
ment showing the volume Of his charge
sales Cor other business transactions)
for the year, the percentage Of reserve
to such amounts, the total amount OF
notes and accounts receivable at the
beginning and end of the taxable year.
and the amount of debts ascertained TO
be worthless or partially worthless,
and charged off against the reserve &C !
count during the taxable year.
To be allowed claims for deductions
or bad debts must have certain quail
ties. The debt, or that portion which is
not recoverable, must have been deter |
mined to be worthless and charged off
within the taxable year. The return
must contain evidence that the ordi-
nary means of collection have been ex-
hausted and that legal ction would in
all probability not result in collection
of the debt.
Unpaid loans made to needy rela- |
tives with little or no expectation OF
their return, are not deductible, but
are regarded as gifts Where the cred |
itor continues TO extend credit 10 a /
debtor. debt may not be charged off
as worthless II a debt is forgiven, it /
cannot be claimed as a deduction. be-
cause it is then regarded as gift, |
which is not an allowable deduction
A valid debt proved to be worthless
is not always a proper deduction. For
example, unpaid amounts representing
wages, salaries. rentals, or similar
items Of taxable income are not allow /
ed as deductions unless included as
income IN the creditors return for the