26 U.S.C. § 166 — Bad debts

Page 772 TITLE 26—INTERNAL REVENUE CODE § 166 ‘‘(d) EFFECTIVE DATE.—The provisions of this section shall apply to taxable years ending after June 30, 1980.’’ [Pub. L. 97–424, title V, § 517(b), Jan. 6, 1983, 96 Stat. 2184, provided that: ‘‘The amendment made by sub- section (a) [adding subsec. (c)(2)(B) of this note] shall apply to taxable years ending after July 30, 1980.’’] TAX TREATMENT OF CERTAIN 1972 DISASTER LOANS Pub. L. 94–455, title XXI, § 2103, Oct. 4, 1976, 90 Stat. 1900, as amended by Pub. L. 99–514, § 2, Oct. 22, 1986, 100 Stat. 2095, provided that: ‘‘(a) APPLICATION OF SECTION.—This section shall apply to any individual— ‘‘(1) who was allowed a deduction under section 165 of the Internal Revenue Code of 1986 [formerly I.R.C. 1954] (relating to losses) for a loss attributable to a disaster occurring during calendar year 1972 which was determined by the President, under section 102 of the Disaster Relief Act of 1970, to warrant disaster as- sistance by the Federal Government. ‘‘(2) who in connection with such disaster— ‘‘(A) received income in the form of cancellation of a disaster loan under section 7 of the Small Busi- ness Act [section 636 of Title 15, Commerce and Trade] or an emergency loan under subtitle C of the Consolidated Farm and Rural Development Act [section 1961 et seq. of Title 7, Agriculture], or ‘‘(B) received income in the form of compensation (not taken into account in computing the amount of the deduction) for such loss in settlement of any claim of the taxpayer against a person for that per- son’s liability in tort for the damage or destruction of that taxpayer’s property in connection with the disaster, and ‘‘(3) who elects (at such time and in such manner as the Secretary of the Treasury or his delegate may by regulations prescribe) to take the benefits of this sec- tion. ‘‘(b) EFFECT OF ELECTION.—In the case of any indi- vidual to whom this section applies— ‘‘(1) the tax imposed by chapter 1 of the Internal Revenue Code of 1986 for the taxable year in which the income taken into account is received or accrued which is attributable to such income shall not exceed the additional tax under such chapter which would have been payable for the year in which the deduc- tion for the loss was taken if such deduction had not been taken for such year, ‘‘(2) any amount of tax imposed by chapter 1 attrib- utable to the income taken into account which, on October 1, 1975, was unpaid may be paid in 3 equal an- nual installments (with the first such installment due and payable on April 15, 1977), and ‘‘(3) no interest on any deficiency shall be payable for any period before April 16, 1977, to the extent such deficiency is attributable to the receipt of such com- pensation, and no interest on any installment re- ferred to in paragraph (2) shall be payable for any pe- riod before the due date of such installment. ‘‘(c) INCOME TAKEN INTO ACCOUNT.—For purposes of this section, the income taken into account is— ‘‘(1) in the case of an individual described in sub- section (a)(2)(A), the amount of income (not in excess of $5,000) attributable to the cancellation of a disaster loan under section 7 of the Small Business Act or an emergency loan under subtitle C of the Consolidated Farm and Rural Development Act received by reason of the disaster described in subsection (a)(1), or ‘‘(2) in the case of an individual described in sub- section (a)(2)(B), the amount of compensation (not in excess of $5,000) for the loss in settlement of any claim of the taxpayer against a person for that per- son’s liability in tort for the damage or destruction of that taxpayer’s property in connection with the disaster described in subsection (a)(1). ‘‘(d) PHASEOUT WHERE ADJUSTED GROSS INCOME EX- CEEDS $15,000.—If for the taxable year for which the de- duction for the loss was taken the individual’s adjusted gross income exceeded $15,000, the $5,000 limit set forth in paragraph (1) or (2) of subsection (c) (whichever ap- plies) shall be reduced by one dollar for each full dollar that such adjusted gross income exceeds $15,000. In the case of a married individual filing a separate return, the preceding sentence shall be applied by substituting ‘$7,500’ for ‘$15,000’. ‘‘(e) STATUTE OF LIMITATIONS.—If refund or credit of any overpayment of income tax resulting from an elec- tion made under this section is prevented on the date of the enactment of this Act [Oct. 4, 1976], or at any time within one year after such date, by the operation of any law, or rule of law, refund or credit of such over- payment (to the extent attributable to such election) may, nevertheless, be made or allowed if claim therefor is filed within one year after such date. If the taxpayer makes an election under this section and if assessment of any deficiency for any taxable year resulting from such election is prevented on the date of the enactment of this Act [Oct. 4, 1976], or at any time within one year after such date, by the operation of any law or rule of law, such assessment (to the extent attributable to such election) may, nevertheless, be made if made within one year after such date.’’ REFUND OR CREDIT OF OVERPAYMENT; TIME FOR FILING CLAIM; INTEREST Pub. L. 91–677, § 1(b)(2), Jan. 12, 1971, 84 Stat. 2061, au- thorized refund or credit of overpayment attributable to the amendments made by subsec. (a) to subsec. (i) of this section if claim therefor was filed after Jan. 12, 1971, and before July 1, 1971, without interest for any period before Jan. 1, 1972. § 166. Bad debts (a) General rule (1) Wholly worthless debts There shall be allowed as a deduction any debt which becomes worthless within the tax- able year. (2) Partially worthless debts When satisfied that a debt is recoverable only in part, the Secretary may allow such debt, in an amount not in excess of the part charged off within the taxable year, as a de- duction. (b) Amount of deduction For purposes of subsection (a), the basis for determining the amount of the deduction for any bad debt shall be the adjusted basis provided in section 1011 for determining the loss from the sale or other disposition of property. [(c) Repealed. Pub. L. 99–514, title VIII, § 805(a), Oct. 22, 1986, 100 Stat. 2361] (d) Nonbusiness debts (1) General rule In the case of a taxpayer other than a cor- poration— (A) subsection (a) shall not apply to any nonbusiness debt; and (B) where any nonbusiness debt becomes worthless within the taxable year, the loss resulting therefrom shall be considered a loss from the sale or exchange, during the taxable year, of a capital asset held for not more than 1 year. (2) Nonbusiness debt defined For purposes of paragraph (1), the term ‘‘nonbusiness debt’’ means a debt other than— (A) a debt created or acquired (as the case may be) in connection with a trade or busi- ness of the taxpayer; or Page 773 TITLE 26—INTERNAL REVENUE CODE § 166 (B) a debt the loss from the worthlessness of which is incurred in the taxpayer’s trade or business. (e) Worthless securities This section shall not apply to a debt which is evidenced by a security as defined in section 165(g)(2)(C). (f) Cross references (1) For disallowance of deduction for worthless- ness of debts owed by political parties and similar organizations, see section 271. (2) For special rule for banks with respect to worthless securities, see section 582. (Aug. 16, 1954, ch. 736, 68A Stat. 50; Pub. L. 85–866, title I, § 8, Sept. 2, 1958, 72 Stat. 1608; Pub. L. 89–722, § 1(a), Nov. 2, 1966, 80 Stat. 1151; Pub. L. 91–172, title IV, § 431(c)(1), Dec. 30, 1969, 83 Stat. 619; Pub. L. 94–455, title VI, § 605(a), title XIV, § 1402(b)(1)(A), (2), title XIX, § 1906(b)(13)(A), Oct. 4, 1976, 90 Stat. 1575, 1731, 1732, 1834; Pub. L. 98–369, div. A, title X, § 1001(b)(1), (e), July 18, 1984, 98 Stat. 1011, 1012; Pub. L. 99–514, title VIII, § 805(a), (b), title IX, § 901(d)(4)(A), Oct. 22, 1986, 100 Stat. 2361, 2379; Pub. L. 100–647, title I, § 1008(d)(1), (2), Nov. 10, 1988, 102 Stat. 3439.) Editorial Notes AMENDMENTS 1988—Subsec. (d)(1)(A). Pub. L. 100–647, § 1008(d)(1), substituted ‘‘subsection (a)’’ for ‘‘subsections (a) and (c)’’. Subsecs. (f), (g). Pub. L. 100–647, § 1008(d)(2), made clarifying amendment to directory language of Pub. L. 99–514, § 805(b), see 1986 Amendment note below. 1986—Subsec. (c). Pub. L. 99–514, § 805(a), struck out subsec. (c), reserve for bad debts, which read as follows: ‘‘In lieu of any deduction under subsection (a), there shall be allowed (in the discretion of the Secretary) a deduction for a reasonable addition to a reserve for bad debts.’’ Subsec. (f). Pub. L. 99–514, § 805(b), as amended by Pub. L. 100–647, § 1008(d)(2), redesignated subsec. (g) as (f) and struck out former subsec. (f) which related to reserve for certain guaranteed debt obligations, par. (1) thereof providing for allowance of deduction, par. (2) dis- allowing deduction in other cases, par. (3) relating to opening balance of reserve, and par. (4) relating to sus- pense account. Subsec. (g). Pub. L. 99–514, § 805(b), as amended by Pub. L. 100–647, § 1008(d)(2), redesignated subsec. (g) as (f). Pub. L. 99–514, § 901(d)(4)(A), struck out pars. (3) and (4) which read as follows: ‘‘(3) For special rule for bad debt reserves of certain mutual savings banks, domestic building and loan asso- ciations, and cooperative banks, see section 593. ‘‘(4) For special rule for bad debt reserves of banks, small business investment-companies, etc., see sections 585 and 586.’’ 1984—Subsec. (d)(1)(B). Pub. L. 98–369 substituted ‘‘6 months’’ for ‘‘1 year’’, applicable to property acquired after June 22, 1984, and before Jan. 1, 1988. See Effective Date of 1984 Amendment note below. 1976—Subsecs. (a)(2), (c). Pub. L. 94–455, § 1906(b)(13)(A), struck out ‘‘or his delegate’’ after ‘‘Sec- retary’’. Subsec. (d)(1)(B). Pub. L. 94–455, § 1401(b)(1)(A), (2), provided that ‘‘6 months’’ would be changed to ‘‘9 months’’ for taxable years beginning in 1977, and ‘‘9 months’’ would be changed to ‘‘1 year’’ for taxable years beginning after Dec. 31, 1977. Subsec. (f). Pub. L. 94–455, §§ 605(a), 1906(b)(13)(A), re- designated subsec. (g) as (f) and struck out ‘‘or his dele- gate’’ after ‘‘Secretary’’ in pars. (1), (3) and (4)(D). Former subsec. (f), which related to treatment of pay- ments made by guarantors of certain noncorporate ob- ligations, was struck out. Subsecs. (g), (h). Pub. L. 94–455, § 605(a), redesignated subsecs. (g) and (h) as (f) and (g), respectively. 1969—Subsec. (h)(4). Pub. L. 91–172 added par. (4). 1966—Subsecs. (g), (h). Pub. L. 89–722 added subsec. (g) and redesignated former subsec. (g) as (h). 1958—Subsec. (d)(2)(A). Pub. L. 85–866 substituted ‘‘a trade or business of the taxpayer’’ for ‘‘a taxpayer’s trade or business’’. Statutory Notes and Related Subsidiaries EFFECTIVE DATE OF 1988 AMENDMENT Amendment by Pub. L. 100–647 effective, except as otherwise provided, as if included in the provision of the Tax Reform Act of 1986, Pub. L. 99–514, to which such amendment relates, see section 1019(a) of Pub. L. 100–647, set out as a note under section 1 of this title. EFFECTIVE DATE OF 1986 AMENDMENT Pub. L. 99–514, title VIII, § 805(d), Oct. 22, 1986, 100 Stat. 2362, provided that: ‘‘(1) IN GENERAL.—The amendments made by this sec- tion [amending this section and sections 81, 108, 461, and 805 of this title] shall apply to taxable years begin- ning after December 31, 1986. ‘‘(2) CHANGE IN METHOD OF ACCOUNTING.—In the case of any taxpayer who maintained a reserve for bad debts for such taxpayer’s last taxable year beginning before January 1, 1987, and who is required by the amendments made by this section to change its method of account- ing for any taxable year— ‘‘(A) such change shall be treated as initiated by the taxpayer, ‘‘(B) such change shall be treated as made with the consent of the Secretary, and ‘‘(C) the net amount of adjustments required by section 481 of the Internal Revenue Code of 1986 to be taken into account by the taxpayer shall— ‘‘(i) in the case of a taxpayer maintaining a re- serve under section 166(f), be reduced by the balance in the suspense account under section 166(f)(4) of such Code as of the close of such last taxable year, and ‘‘(ii) be taken into account ratably in each of the first 4 taxable years beginning after December 31, 1986.’’ Pub. L. 99–514, title IX, § 901(e), Oct. 22, 1986, 100 Stat. 2380, provided that: ‘‘The amendments made by this section [amending this section and sections 172, 291, 582, 585, 593, 596, 856, 1277, and 1361 of this title and repealing section 586 of this title] shall apply to taxable years be- ginning after December 31, 1986.’’ EFFECTIVE DATE OF 1984 AMENDMENT Pub. L. 98–369, div. A, title X, § 1001(e), July 18, 1984, 98 Stat. 1012, provided that: ‘‘The amendments made by this section [amending this section and sections 341, 402, 403, 423, 582, 584, 631, 642, 702, 818, 852, 856, 857, 1222, 1223, 1231, 1232, 1233, 1234, 1235, 1246, 1247, 1248, 1251, and 1278 of this title] shall apply to property acquired after June 22, 1984, and before January 1, 1988.’’ EFFECTIVE DATE OF 1976 AMENDMENT Pub. L. 94–455, title VI, § 605(c), Oct. 4, 1976, 90 Stat. 1575, provided that: ‘‘The amendments made by this section [amending this section and section 81 of this title] shall apply to guarantees made after December 31, 1975, in taxable years beginning after such date.’’ Pub. L. 94–455, title XIV, § 1402(b)(1), Oct. 4, 1976, 90 Stat. 1731, provided that the amendment made by that section is effective with respect to taxable years begin- ning in 1977. Pub. L. 94–455, title XIV, § 1402(b)(2), Oct. 4, 1976, 90 Stat. 1732, provided that the amendment made by that section is effective with respect to taxable years begin- ning after Dec. 31, 1977. Page 774 TITLE 26—INTERNAL REVENUE CODE § 167 EFFECTIVE DATE OF 1969 AMENDMENT Amendment by Pub. L. 91–172 applicable to taxable years beginning after July 11, 1969, see section 431(d) of Pub. L. 91–172, set out as an Effective Date note under section 585 of this title. EFFECTIVE DATE OF 1966 AMENDMENT Pub. L. 89–722, § 2, Nov. 2, 1966, 80 Stat. 1152, as amend- ed by Pub. L. 99–514, § 2, Oct. 22, 1986, 100 Stat. 2095, pro- vided that: ‘‘(a) Except as provided in subsections (b) and (c), the amendments made by the first section of this Act [amending this section and section 81 of this title] shall apply to taxable years ending after October 21, 1965. ‘‘(b) If— ‘‘(1) the taxpayer before October 22, 1965, claimed a deduction, for a taxable year ending before such date, under section 166(c) of the Internal Revenue Code of 1986 [formerly I.R.C. 1954] for an addition to a reserve for bad debts on account of debt obligations described in section 166(g)(1)(A) of such Code (as amended by the first section of this Act), and ‘‘(2) the assessment of a deficiency of the tax im- posed by chapter 1 of such Code for such taxable year and each subsequent taxable year ending before Octo- ber 22, 1965, is not prevented on December 31, 1966, by the operation of any law or rule of law, then such deduction on account of such debt obliga- tions shall be allowed for each such taxable year under such section 166(c) to the extent that the deduction would have been allowable under the provisions of such section 166(g)(1)(A) if such provisions applied to such taxable years. ‘‘(c) Section 166(g)(2) of the Internal Revenue Code of 1986 (as amended by the first section of this Act) shall apply to taxable years beginning after December 31, 1953, and ending after August 16, 1954.’’ EFFECTIVE DATE OF 1958 AMENDMENT Amendment by Pub. L. 85–866 applicable to taxable years beginning after Dec. 31, 1953, and ending after Aug. 16, 1954, see section 1(c)(1) of Pub. L. 85–866, set out as a note under section 165 of this title. ESTABLISHMENT OF RESERVE FOR TAXABLE YEAR END- ING AFTER OCT. 21, 1965, AND BEGINNING BEFORE AUG. 2, 1966 Pub. L. 89–722, § 1(c), Nov. 2, 1966, 80 Stat. 1152, as amended by Pub. L. 99–514, § 2, Oct. 22, 1986, 100 Stat. 2095, provided that: ‘‘If the taxpayer establishes a re- serve described in section 166(g)(1) of the Internal Rev- enue Code of 1986 [formerly I.R.C. 1954] (as amended by subsection (a) of this section) for a taxable year ending after October 21, 1965, and beginning before August 2, 1966, the establishment of such reserve shall not be con- sidered as a change in method of accounting for pur- poses of section 446(e) of such Code.’’ § 167. Depreciation (a) General rule There shall be allowed as a depreciation de- duction a reasonable allowance for the exhaus- tion, wear and tear (including a reasonable al- lowance for obsolescence)— (1) of property used in the trade or business, or (2) of property held for the production of in- come. (b) Cross reference For determination of depreciation deduction in case of property to which section 168 applies, see section 168. (c) Basis for depreciation (1) In general The basis on which exhaustion, wear and tear, and obsolescence are to be allowed in re- spect of any property shall be the adjusted basis provided in section 1011, for the purpose of determining the gain on the sale or other disposition of such property. (2) Special rule for property subject to lease If any property is acquired subject to a lease— (A) no portion of the adjusted basis shall be allocated to the leasehold interest, and (B) the entire adjusted basis shall be taken into account in determining the deprecia- tion deduction (if any) with respect to the property subject to the lease. (d) Life tenants and beneficiaries of trusts and estates In the case of property held by one person for life with remainder to another person, the de- duction shall be computed as if the life tenant were the absolute owner of the property and shall be allowed to the life tenant. In the case of property held in trust, the allowable deduction shall be apportioned between the income bene- ficiaries and the trustee in accordance with the pertinent provisions of the instrument creating the trust, or, in the absence of such provisions, on the basis of the trust income allocable to each. In the case of an estate, the allowable de- duction shall be apportioned between the estate and the heirs, legatees, and devisees on the basis of the income of the estate allocable to each. (e) Certain term interests not depreciable (1) In general No depreciation deduction shall be allowed under this section (and no depreciation or am- ortization deduction shall be allowed under any other provision of this subtitle) to the taxpayer for any term interest in property for any period during which the remainder inter- est in such property is held (directly or indi- rectly) by a related person. (2) Coordination with other provisions (A) Section 273 This subsection shall not apply to any term interest to which section 273 applies. (B) Section 305(e) This subsection shall not apply to the holder of the dividend rights which were sep- arated from any stripped preferred stock to which section 305(e)(1) applies. (3) Basis adjustments If, but for this subsection, a depreciation or amortization deduction would be allowable to the taxpayer with respect to any term interest in property— (A) the taxpayer’s basis in such property shall be reduced by any depreciation or am- ortization deductions disallowed under this subsection, and (B) the basis of the remainder interest in such property shall be increased by the amount of such disallowed deductions (prop- erly adjusted for any depreciation deduc- tions allowable under subsection (d) to the taxpayer).