Skip to main content
Find a Lawyer

Code of Federal Regulations Title 26. Internal Revenue § 26.1.166–4 Reserve for bad debts

Current as of January 02, 2025 | Updated by Findlaw Staff

(a) Allowance of deduction.A taxpayer who has established the reserve method of treating bad debts and has maintained proper reserve accounts for bad debts or who, in accordance with paragraph (b) of § 1.166–1, adopts the reserve method of treating bad debts may deduct from gross income a reasonable addition to a reserve for bad debts in lieu of deducting specific bad debt items. This paragraph applies both to bad debts owed to the taxpayer and to bad debts arising out of section 166(f)(1)(A) guaranteed debt obligations. If a reserve is maintained for bad debts arising out of section 166(f)(1)(A) guaranteed debt obligations, then a separate reserve must also be maintained for all other debt obligations of the taxpayer in the same trade or business, if any. A taxpayer may not maintain a reserve for bad debts arising out of section 166(f)(1)(A) guaranteed debt obligations if with respect to direct debt obligations in the same trade or business the taxpayer takes deductions when the debts become worthless in whole or in part rather than maintaining a reserve for such obligations. See § 1.166–10 for rules concerning section 166(f)(1)(A) guaranteed debt obligations.

(b) Reasonableness of addition to reserve—(1) Relevant factors.What constitutes a reasonable addition to a reserve for bad debts shall be determined in the light of the facts existing at the close of the taxable year of the proposed addition. The reasonableness of the addition will vary as between classes of business and with conditions of business prosperity. It will depend primarily upon the total amount of debts outstanding as of the close of the taxable year, including those arising currently as well as those arising in prior taxable years, and the total amount of the existing reserve.

(2) Correction of errors in prior estimates.In the event that subsequent realizations upon outstanding debts prove to be more or less than estimated at the time of the creation of the existing reserve, the amount of the excess or inadequacy in the existing reserve shall be reflected in the determination of the reasonable addition necessary in the current taxable year.

(c) Statement required.A taxpayer using the reserve method shall file with his return a statement showing—

(1) The volume of his charge sales or other business transactions for the taxable year and the percentage of the reserve to such amount;

(2) The total amount of notes and accounts receivable at the beginning and close of the taxable year;

(3) The amount of the debts which have become wholly or partially worthless and have been charged against the reserve account;  and

(4) The computation of the addition to the reserve for bad debts.

(d) Special rules applicable to financial institutions. For special rules for the addition to the bad debt reserves of certain banks, see §§ 1.585–1 through 1.585–3.

Previous Part of Code Next Part of Code
Back to Chapter List

Cite this article: FindLaw.com - Code of Federal Regulations Title 26. Internal Revenue § 26.1.166–4 Reserve for bad debts - last updated January 02, 2025 | https://codes.findlaw.com/cfr/title-26-internal-revenue/cfr-sect-26-1-166-4/

FindLaw Codes may not reflect the most recent version of the law in your jurisdiction. Please verify the status of the code you are researching with the state legislature before relying on it for your legal needs.

Was this helpful?

Welcome to FindLaw's Cases & Codes

A free source of state and federal court opinions, state laws, and the United States Code. For more information about the legal concepts addressed by these cases and statutes, visit FindLaw’s Learn About the Law.

Go to Learn About the Law

Latest Blog Posts

For Legal Professionals

Learn About The Law

Get help with your legal needs

FindLaw’s Learn About the Law features thousands of informational articles to help you understand your options. And if you’re ready to hire an attorney, find one in your area who can help.

Go to Learn About the Law

Need to Find an Attorney?

Search our directory by legal issue

Enter information in one or both fields (Required)

Copied to clipboard