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Significantly modified debt. An exception to the charge-off rule exists for debt that has been significantly modified and on which the holder recognized gain. For more information, see Regulations section 1.166-3(a)(3). Deduction disallowed. Generally, you can claim a partial bad debt deduction only in the year you make the charge-off on your books. If, under audit, the IRS doesn’t allow your deduc- tion and the debt becomes partly worthless in a later tax year, you can deduct the amount you charged off in that year plus the disallowed amount charged off in the earlier year. The charge-off in the earlier year, unless reversed on your books, fulfills the charge-off require- ment for the later year. Totally worthless debts. If a debt becomes totally worthless in the current tax year, you can deduct the entire amount minus any amount de- ducted in an earlier tax year when the debt was only partly worthless. You don’t have to make an actual charge-off on your books to claim a bad debt deduction for a totally worthless debt. However, you may want to do so. If you don’t and the IRS later rules the debt is only partly worthless, you’ll not be allowed a deduction for the debt in that tax year because a deduction of a partly worthless bad debt is limited to the amount actually charged off. See Partly worthless debts, earlier. Filing a claim for refund. If you didn’t deduct a bad debt on your original return for the year it became worthless, you can file a claim for a credit or refund. If the bad debt was totally worthless, you must file the claim by the later of the following dates. • 7 years from the date your original return was due (not including extensions). • 2 years from the date you paid the tax. If the claim is for a partly worthless bad debt, you must file the claim by the later of the follow- ing dates. • 3 years from the date you filed your original return. • 2 years from the date you paid the tax. You may have longer to file the claim if you were unable to manage your financial affairs due to a physical or mental impairment. Such an impairment requires proof of existence. For details and more information about filing a claim, see Pub. 556. Use one of the following forms to file a claim. For more information, see the instructions for the applicable form. Table 10-1. Forms Used To File a Claim IF you filed as a... THEN file... sole proprietor or farmer Form 1040X. corporation Form 1120X. S corporation Form 1120S and check box H(4). partnership Form 1065X if filing on paper or Form 1065 and check box G(5) if filing electronically. Nonaccrual-Experience Method Generally, a person using accrual accounting isn’t required to accrue a service-provided re- ceivable that experience shows won't be collec- ted if: • The service provided is health, law, engi- neering, architecture, accounting, actuarial science, performing arts, or consulting; or • The person's average annual gross re- ceipts for all previous 3‐tax‐year periods don't exceed $25 million. See section 448 for details and exceptions. Recovery of a Bad Debt If you claim a deduction for a bad debt on your income tax return and later recover (collect) all or part of it, you may have to include all or part of the recovery in gross income. The amount you include is limited to the amount you actually deducted. However, you can exclude the amount deducted that did not reduce your tax. Report the recovery as “Other income” on the appropriate business form or schedule. See Recoveries in Pub. 525 for more infor- mation. NOL carryover. If a bad debt deduction in- creases an NOL carryover that has not expired before the beginning of the tax year in which the recovery takes place, you treat the deduction as having reduced your tax. A bad debt deduction that contributes to an NOL helps lower taxes in the year to which you carry the NOL. For more information about NOLs for individuals, see Pub. 536. Also, see the Instructions for Form 1045, and the Instructions for Form 1139. 11. Other Expenses What's New Standard mileage rate. Beginning in 2018, the standard mileage rate for the cost of operat- ing your car, van, pickup, or panel truck for business use is 54.5 cents per mile. For more information, see Car and truck expenses under Miscellaneous Expenses, later. No miscellaneous itemized deductions al- lowed. You can no longer claim any miscella- neous itemized deductions, including the de- duction for repayments (claim of right). Miscellaneous itemized deductions are those deductions that would have been subject to the 2%-of-adjusted-gross-income limitation. Qualified business income deduction. For tax years beginning after 2017, individual tax- payers and some trusts and estates may be en- titled to a deduction of up to 20% of their Quali- fied Business Income (QBI) from a trade or business, including income from a pass-through entity, but not from a C corporation, plus 20% of qualified real estate investment trust (REIT) div- idends and qualified publicly traded partnership (PTP) income. The deduction is subject to mul- tiple limitations, such as the type of trade or business, the taxpayer’s taxable income, the amount of W-2 wages paid in the trade or busi- ness, and the unadjusted basis immediately af- ter acquisition (UBIA) of qualified property held by the trade or business. The deduction can be taken in addition to the standard or itemized de- ductions. See chapter 12 of this publication for more information. Travel, meals, and entertainment. In gen- eral, entertainment expenses are no longer de- ductible. For more information on travel and non-entertainment related meals including de- ductibility, see Pub. 463. Certain payments made in sexual harass- ment or sexual abuse cases. For amounts paid or incurred after December 22, 2017, new section 162(q) provides that no deduction is al- lowed under section 162 for any settlement or payment related to sexual harassment or sexual abuse if it is subject to a nondisclosure agree- ment. In addition, attorney’s fees related to such a settlement or payment are not allowed as a deduction. Introduction This chapter covers business expenses that may not have been explained to you, as a busi- ness owner, in previous chapters of this publi- cation. Topics This chapter discusses: • Travel and non-entertainment related meals Page 42 Chapter 11 Other Expenses