Employer filed for bankruptcy, never paid my client

[GS1]

Employer filed for bankruptcy, never paid the 25,000 he owed my client!
how to enter this loss in a 1040 return... thank you!

[PhoebeRoberts]

No deduction for income you never paid tax on in the first place. 

[GS1]

Hi PhoebeRoberts,

Wouldn't that be entered a Net Operating loss that started in 2024Or,
 in Schedule C under return and allowances?

[Karen_pdx]

If your client is a cash basis taxpayer and was owed wages that were never paid, he has no basis in that loss and receives no deduction, since the measure of the loss is the lower of fmv or basis. The only consolation for the taxpayer is that the W-2 he receives should not include those unpaid wages, so he doesn't pay tax on them, but also doesn't receive the cash.

If your client was paid the wages, but made a loan to the employer of the net pay so the employer recorded a loan payable to your client and not simply accrued wages payable, then the facts are different and there would be a different answer. Can you tell whether the 2024 W-2 includes the wages?

[PhoebeRoberts]

My money is on that guy being a contractor, not an employee, and there existing neither a W-2 nor a 1099. (Employees get paid first in bankruptcy; a contractor is never getting anything.)

[qbteachmt]

"be entered a Net Operating loss"

Are you describing that your client was a Vendor to this bankrupt company, and not an employee, and did not lose wages?

Here's the problem with your wording: you don't Lose what you never Had.

For a Schedule C cash basis taxpayer, there is no entry for the missing part of gross income, so there is no entry for the unpaid income as a loss. "You can't write off what you didn't write on" as one of our lost members used to state.

An unpaid sale isn't a tax loss. There still is the write off of the cost (labor and materials), but there is no Profit, since there was no income. If you could enter lost income, what's stopping you from entering a $25,000 sale as $250,000?

It's going to be different on accrual basis, if this is unpaid AR, for instance.

This is why details matter.

[GS1]

Thanks qbteachmt,
By the way, through the years, I always enjoyed your replies and posts.

"...For a Schedule C cash basis taxpayer, there is no entry for the missing part of gross income, so there is no entry for the unpaid income as a loss".

I was told check on Schedule C; an entry under "Returns and allowances, ". 
My client supposed to get a 1099-NEC at the end of the project. Ipso facto he is a contractor
The first 3 months of work were worth $25,000 that were never paid because of the sudden bankruptcy. 

At first, I doubted that the $25,000 can be allocated under "Returns and Allowances"; this is why I checked the Community.
It boggles my mind though, that three months' work, is just going to be whipped out and gone and nothing can be deducted on the return.

[sjrcpa]

He earned -0-. He is taxed on -0-.

[GS1]

Thanks, sjrcpa...
It is also good time to thank you for some of your replies (to other members) that helped me so much.

[Accountant-Man]

Do you know what an NOL is?

[qbteachmt]

"was told check on Schedule C; an entry under "Returns and allowances, ".

For a cash basis entity, and especially when reconciling sales tax reporting to income tax reporting, I would offer an example:

You sell some auto part for $100. You give a 5% discount/rebate for the old part which gets sent to a recycler or rebuild shop.

"My client supposed to get a 1099-NEC at the end of the project."

Only for what they got paid, and only from that business which paid them $600 or more. If that client stiffed them, they won't get a 1099-NEC from them.

And that's not the income reporting requirement. It's informational. Your client reports all income from all clients. If a bunch of private clients pay over $1 million each, no 1099-NEC is required. Your client still reports all of that income.

"Ipso facto he is a contractor"

We could not tell from the initial wording "Employer Filed For Bankruptcy" because this was a customer or client, not an Employer. It helps to be correctly and definitively stated.

"It boggles my mind though, that three months' work, is just going to be whipped out and gone and nothing can be deducted on the return."

If your taxpayer client has employees, their labor is an expense. All materials and costs to do the job are business deductions. A Self-Employed Sched C person has no value to their business for their labor, according to the tax regulations. And this is why you get a deposit or prepayment, and try to set up your contract with progress billing, if it takes that long.

And I guess you've never been stiffed by a client for payment? It took me nearly 1 year of chasing a client, to get paid. My father (a Lacerte user) died with probably 4 clients still owing, mostly from one family, and I never collected on that for him.