27 Feb A contractor scammed me. Can I take a loss?

Q. I hired a contractor who never did the job and I won a judgment. I don’t think I will ever collect. Can I take it as a tax write-off?
— Scammed

A. Sorry to hear you had a bad experience with a contractor.

Here’s how taking a loss would work.

In general, if you deposit money with a contractor and the contractor becomes insolvent and the work is personal — unrelated to your trade or business — it is a non-business bad debt, said Gail Rosen, a Martinsville-based certified public accountant.

To qualify as a non-business bad debt, it must be totally worthless, Rosen said, and it’s deductible in the year when it is apparent that there is no hope of recovery if the contractor is insolvent.

Rosen said non-business bad debts are deducted as short-term capital losses on Schedule D.

“Since this is a short-term capital loss, you can offset this against other capital gains. However, if your capital losses exceed your capital gains, then you are limited to a maximum of $3,000 loss deduction in any one year,” she said. “Any remaining loss must be carried forward to the next year.”

If the contractor is solvent and just ripped you off, it’s deductible as a theft/casualty loss, Rosen said.

“Casualty losses are limited in their deductible loss by $100 per casualty and then are further reduced by 10 percent of your adjusted gross income,” Rosen said. “Any net casualty loss allowable is an itemized tax deduction.”

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This post was first published in February 2017.