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Show i a I INCOME TAX FACTS 4 4 The revenue act of 1921 contains (two new and Important provisions (with respect to deductions for bad debts. Pebts ascertained to be worth -less and charged off during the year .' 1921 may he deducted, and when satisfied satis-fied that a debt is recoverable only in part, the commissioner of Internal SjSVenue may allow nuch debt to be ri d off in part. Where a taxpave'r, as n. matter of established business pirn-tut. .-Ms up annually a reserve for bad debts, based (upon experience, reasonable additions to such reserve during the ye;ir. within with-in the discretion of the commissioner, may be deducted. In such a case. li Ms written off on the books of the taxpayer must be charged against tho reserve, ar.d must not be claimed us B deduction from gro.-s Income. Before deducting a debt in part ; taxpayer must be able to show with a reasonable degree of certainty th amount uncollcctable. In determJnlnc whether a debt Is worthless In who; or in part, tho commissioner will Consider Con-sider pertinent evidence, such as the value of collateral. If any. and the financial condition of the debtor. Partial Par-tial deductions will be allowed with respect to specific debts only. Ill M im ICO M NTS. Taxpayers, who prior to 192 1. have maintained reserve accounts for bad debts mnj deduct a reasonable addition ad-dition to such reserves during the I ist year In lieu of a deduction for specific bad debt Items. Those wh- have not heretofore maintained such reserve accounts, may now elect to do so. In such case they may deterniln the amount that reasonably should have been set up at Iecember 30, 192P, (which sum shall not be deducted deduct-ed in computing not income), and for 1921 and subsequent years, may add B reasonable addition to such reserve, and deduct the amount in computing net Income What con-stitutes such reaeonahle addition" must be determined deter-mined in ths light of facts, and will s.iry ;is between classes Of business, and" with conditions of business prosperity. pros-perity. Specific Items of bad debts lacertained to be worthless should be charged against Ihc resere fund, and nni untai i I'm iii rroM income. A taxpayer using hi" reserve muth-od muth-od should Include in his return a statement state-ment showing the volume of his charge s.ib-.s i'.i other business transai Hons ) I for the year, the percentage of re-Uerve re-Uerve to such amounts. the total 'amount of notes and accounts receivable receiv-able at tho beginning and end of the I taxable year, and the amount of debts ascertained to be worthless or partially partial-ly worthless, ind charged off OgalnSl the reserve account during tho taxable tax-able year. To be allowed, claims for deductions 6 bad debts must have certain iual-tlee. iual-tlee. The debt, or that portion which Is not recoverable, must have been determined de-termined i ' i be worthless and charged off within the taxable year. The return re-turn must contain evidence that the .ii... i i. ,, hnvi Orainnrj means iii twin"-""" ' been exhausted and that legal action would in all probability not result In collection of the debt Unpaid loans made to needy relatives rela-tives with little or no expectation of their return, arc not deductible but are regarded as gilts. Where the creditor continues to extend credit to a debtor, a debi may not be charged off as worthless. If a debt is forgiven for-given it cannot be cla.mec. as a deduction, de-duction, because it is then regarded as a gift, which Is not an allowable deduction. ' , A valid debt proved to be worthless is not always n proper deduction. For example, unpaid amounts representing wages, salaries, rentals or similar items of taxable income are not allowed al-lowed as deductions unless included as Income In the creditor s return for fte year In which the deduction is sought. or previous vears. The met MM expected ex-pected Income was not received docs not reduce the amount of taxable income. |