debt examples include: Credit sales to customers Loans to clients, suppliers, distributers, and employees Business loan guarantees When deducting a business bad debt, the deduction is figured through the taxable income that is based on your business's full or partial gross income. Nonbusiness bad debts Nonbusiness bad debts are all other debts that are not business bad debts. To deduct a nonbusiness bad debt, it has to be completely worthless. A debt becomes worthless when it is reasonable to believe it will never be repaid after you have taken the steps to collect it. The deduction can only be taken in the year that the debt is determined to be worthless. Mortgage bad debt Mortgages that may be non-collectible can be written off as bad debt as well. However, they fall under a slightly different set of rules. As stated above, they can only be written off against tax capital, or income, but they are limited to a deduction of $3,000 per year. Any loss above that can be carried over to the following years at the same amount. Thus a $60,000 mortgage bad debt will take 20 years to write off. Most owners of junior (2nd, 3rd, etc.) fall into this when the 1st mortgage forecloses with no equity remaining to pay on the junior liens. There is one option available for mortgages not available for the business debt: donation. The difference is that a valuation of $10,000 can be taken without an appraisal. An appraisal may be able to increase the value to more and must be based on other similar mortgages that actually sold, but generally it is less than the face value. The real difference is that as a donation the amount of deduction is limited to up to 50% of adjusted gross income per year with carryovers taken over the next 5 years. This is because the deduction is now classified as a donation instead of a bad debt write off and uses Schedule A instead of Schedule D. This can significantly increase the current year's tax reductions compared to the simple write off. The caveat is that it must be completed prior to the date of final foreclosure and loss. The process is simple, but finding a charity to cooperate with is difficult since there will be no cash value as soon as the 1st mortgage forecloses. Problem loan Problem loans are loans that