Arkansas Administrative Code
Agency 006 - Department of Finance and Administration
Division 05 - Division of Revenues
Regulation 1997-4 - Comprehensive Individual Income Tax Regulations
Rule 26-51-425 - DEDUCTIONS - WORTHLESS DEBTS
Rule 1.26-51-425 - Worthless Debts

Worthless debts shall be allowed as deductions from income after being ascertained as such. There are two types of bad debts an individual may incur, business and non-business. A business bad debt is created and deductible from the taxpayers ordinary net income computation. A nonbusiness bad debt is listed on a Federal schedule "D" with documents and deducted as a short term capital loss. There shall accompany the return a statement showing the propriety of any deduction claimed for bad debts. Before a taxpayer may charge off and deduct a debt in part, he must ascertain and be able to demonstrate with a reasonable degree of certainty the amount thereof which is uncollectible. An amount subsequently received on account of a bad debt, or on account of a part of such debt previously charged off and allowed as a deduction for income tax purposes must be included in gross income in the tax year in which received.

Bankruptcy is generally an indication of the worthlessness of at least a part of an unsecured and unpreferred debt. Actual determination of worthlessness in bankruptcy cases is sometimes possible before and, at other times, only when settlement in bankruptcy shall have been made. Where a taxpayer ascertained a debt to be worthless and charged it off in one tax year, the mere fact that bankruptcy proceedings instituted against the debtor are terminated in a later tax year, confirming the conclusion that the debt is worthless, will not authorize shifting the deduction to such later tax year. If a taxpayer computes his income upon the basis of valuing his notes or accounts receivable at their fair market value when received, which may be less than their face value, the amount deductible for bad debts in any case is limited to such original valuation.

Worthless debts arising from unpaid wages, salaries, rents and similar items of taxable income, will not be allowed as a deduction unless such items have been entered as income in the books of the taxpayer in a prior tax year or in the tax year in which the deduction was made. Only the difference between the amount received in distribution of the assets of a bankruptcy and the amount of the claim may be deducted as a bad debt. The difference between the amount received by a creditor of a decedent in distribution of the assets of the decedent's estate and the amount of his claim may be considered a worthless debt. A purchaser of accounts receivable which cannot be collected and are subsequently charged off the books as bad debts is entitled to deduct them, the amount of the deductions to be based upon the price he paid for them and not upon their face value.