The Fair Tax Act, Part LI
Moving on with Chapter 8, which defines bad debts:
SEC. 802. BAD DEBTS.
`(a) In General- For purposes of section 205(a), a bad debt shall be a business debt that becomes wholly or partially worthless to the payee.
`(b) Business Loan- For purposes of subsection (a), a business loan or debt is a bona fide loan or debt made for a business purpose that both parties intended be repaid.
`(c) Determination of Worthlessness-
`(1) IN GENERAL- No loan or debt shall be considered wholly or partially worthless unless it has been in arrears for 180 days or more, except that if a debt is discharged wholly or partially in bankruptcy before 180 days has elapsed, then it shall be deemed wholly or partially worthless on the date of discharge.
`(2) DETERMINATION BY HOLDER- A loan or debt that has been in arrears for 180 days or more may be deemed wholly or partially worthless by the holder unless a payment schedule has been entered into between the debtor and the lender.
`(d) Cross Reference- See section 205(c) for tax on subsequent payments.
This simply defines a bad debt as being a debt for a business purpose (virtually all loans other than personal loans) and also defines the amount of time necessary (180 days or roughly 6 months) before you can deem it a bad debt and take a tax credit on the loan. The person loaning the money is, as you might recall from Section 205, able to get the taxes back that have been remitted on loans that aren’t repaid.
