Jed is an electrician.He and his wife are accrual basis taxpayers and file a joint return.Jed wired a new house for Alison and billed her $15,000.Alison paid Jed $10,000 and refused to pay the remainder of the bill, claiming the fee
To be exorbitant.Jed took Alison to Small Claims Court for the unpaid amount and was awarded a $2,000 judgement.Jed was able to collect the judgement but not the remainder of the bill from Alison.What amount of loss may Jed deduct in the current year?

Question

Quizplus · Accepted Answer

According to the accrual basis of accounting, income should be recognized when it is earned, regardless of whether it has been received or not. However, a bad debt expense can be taken for the portion that is deemed uncollectible. In this case, Jed earned $15,000 but was only able to collect $10,000, leaving an uncollectible amount of $5,000. Since he was able to collect $2,000 through the Small Claims Court, he can only claim a bad debt expense of $3,000 ($5,000 - $2,000) on his current year tax return. Therefore, the correct answer is option C.

Jed Is an Electrician