What are the tax implication for paying a contractor in full who disapears without finishing the job?
According to IRS Publication 550: “Insolvency of contractor. You can take a bad debt deduction for the amount you deposit with a contractor if the contractor becomes insolvent and you are unable to recover your deposit. If the deposit is for work unrelated to your trade or business, it is a nonbusiness bad debt deduction.” That would indicate that you could claim a bad debt. and “Deduct nonbusiness bad debts as short-term capital losses on Schedule D (Form 1040). ” Schedule D is for the reporting of Capital Gains & Losses and a bad debt would count as a short-term loss. However, you can only deduct up to $3,000 of net losses (married, single = 1500) above capital gains. So if you had no capital gains (and were married filing jointly) you could claim $3,000 this year and carry over the balance to future years. If you have capital gains this year, you can offset them by using the bad debt. Example: You are married filing jointly. You have $2,000 in capital gains You give the contractor a
