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What are the tax implication for paying a contractor in full who disapears without finishing the job?
I paid a contractor in full for work on my home. He partially completed the work and skipped town. Can his refusal to refund my payment be considered a bad debt on my taxes?
Public Comments
- No. A bad debt is based on his borrowing the money with every intention of paying you back in cash. You can talk to a lawyer and see if this qualifies as a theft (conversion of funds) under state law, but a theft loss is reduced by 10% of your AGI and then added to your itemized deductions...so you rarely get anything for it. The problem is, you typically add this to your basis and get the money "back" only if you have a taxable gain when you go to sell. As for the 550 quotes. This was not a deposit once the work was started. The builder skipped town with the money--this is not a insolvent contractor.
- No. You did not "lend" him the money.
- According to IRS Publication 550: "Insolvency of contractor. You can take a bad debt deduction for the amount you deposit with a contractor if the contractor becomes insolvent and you are unable to recover your deposit. If the deposit is for work unrelated to your trade or business, it is a nonbusiness bad debt deduction." That would indicate that you could claim a bad debt. and "Deduct nonbusiness bad debts as short-term capital losses on Schedule D (Form 1040). " Schedule D is for the reporting of Capital Gains & Losses and a bad debt would count as a short-term loss. However, you can only deduct up to $3,000 of net losses (married, single = 1500) above capital gains. So if you had no capital gains (and were married filing jointly) you could claim $3,000 this year and carry over the balance to future years. If you have capital gains this year, you can offset them by using the bad debt. Example: You are married filing jointly. You have $2,000 in capital gains You give the contractor a deposit of 10,000. He goes out of business. You can offset the $2,000 in gains plus claim another $3,000 in losses. The remaining $5,000 you can use as a carry-forward to next year.
