Question: James has found himself with both a business and a nonbusiness bad debt. His business bad debt was from his guitar repair business, where credit he extended to Brian in 2018 became uncollectible in 2022. When James tells his accountant, Quinn, about his bad debt, Quinn remembers §6511, the code section explaining the statute of limitations for amending returns. Can this code section help James remedy his bad debt?
Answer: Yes, it can. In §6511(d), Quinn notes that because of the difficulties in pinpointing the year a loan becomes wholly worthless, the normal three-year statute of limitations for filing amended returns does not apply to bad debt losses. Instead, a seven-year statute of limitations generally applies for refunds due to such losses.
This special seven-year statute applies only to bad debts (business and nonbusiness) and worthless securities [§6511(d)]. Any other items on an affected prior-year return will be subject to the normal three-year statute of limitations.
Quinn can therefore amend James’ returns in respect to the bad debts, even though the standard statute of limitations timeframe is passed.
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