In October 2018, Jonathon Remodeling Co., an accrual-method taxpayer, remodels and renovates an office building for Dale and bills him $30,000. Dale signs a note for the debt. Dale keeps delaying payment and files bankruptcy in 2019. Creditors are informed that no assets are available for payment. Jonathon Remodeling Co. will report
A) $0 income in both years.
B) $30,000 income in 2018 and a bad debt deduction of $30,000 in 2019.
C) $30,000 income in 2018 and a STCL of $30,000 in 2019 limited to $3,000 after netting.
D) $30,000 income in 2018 and then must amend last year's return to show $0 income when advised of the bankruptcy.
B) $30,000 income in 2018 and a bad debt deduction of $30,000 in 2019.
Since Jonathon Remodeling Co. is an accrual-basis taxpayer, the $30,000 is recognized in income when billed in 2018. The debt is a business bad debt since it is related to a trade or business. The nonpayment in 2019 results in a business bad debt which is an ordinary loss deductible in 2019.
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