By: Amanda Wilson
For partnership, individuals and other types of taxpayers that are not in the business of making loans, the main avenue for tax relief when a loan goes bad is Section 166 – the bad debt deduction. In order to claim this deduction, the taxpayer must show that the debt has become wholly worthless during the tax year in which the deduction is claimed. This can often be a very difficult burden for taxpayers, especially if there is no external event that they can identify as a trigger for worthlessness. Even if there is such an event (such as the borrower declaring bankruptcy), worthlessness can be difficult to establish.