Question

Contractor Bankruptcy - Deduct as Nonbusiness Bad Debt

Forum|Forum|1 year ago
March 4, 2025
1 reply
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Hired a contractor to complete work at my personal house, and long story short, the contractor filed bankruptcy which left me out a sum of money for the uncompleted work. In doing some research, it appears I may be able to deduct this loss as nonbusiness bad debt via Form 8949. The bankruptcy was just recently closed out in February 2025. A few questions:

1. Am I correct in that I can deduct as nonbusiness bad debt?

2. Do I take the bad debt deduction in my 2024 return (current filing) or next years (2025), since the debt became officially worthless in 2025?

3. Am I limited to the $3000 capital loss deduction per year? And if so, do I deduct $3000 each year going forward until it's all accounted for?

Thanks for any assistance.

DaveF1006

No, you would not be able to classify this as a non-business bad debt because these generally apply to personal loans or debts that individual lend to others, which become uncollectible. In this case, you didn't lend anything but instead, entered into a contract which is not a debt instrument.

Since, you entered into a contract, you experienced is a breach of contract. Since the contractor claimed bankruptcy, you may not have grounds for legal action but you may wish to consult with a legal professional to discuss possible remedies.

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K

kpankpowAuthor

Thanks for the response. I dug into it more, and found that in IRS Publication 550 there's a section for "insolvency of contractor" and it states that it can be deducted as non-business bad debt. To clarify my situation, the contractor was paid in advance for tasks, which I'd consider a deposit, and when they filed bankruptcy, we were not able to recover the deposit. Does any of this change your interpretation?