Dear Tax Talk,
My wife is a day care provider. One of her clients did not pay her. Is there anywhere on the tax form to deduct this as a loss?
Most small business service providers use the cash-basis method of accounting for reporting income and expenses. Under the cash-basis method, you don't report income that is not collected, or alternatively, you report your income in the year collected. If you don't collect a fee, you don't pay tax on it. Once you collect something and report it as income, you have a tax basis in it; if it gets spent, lost, destroyed or misappropriated, you can claim a deduction or loss for it.
Because your wife's business most likely is cash-basis for tax reporting purposes, she cannot realize a loss for an uncollected account. She has no basis in it. If your wife incurred expenses in caring for the child, those expenses would be deducted without regard as to whether she was paid by the parent. For example, if your wife provided lunch to the child, the cost of that lunch would have already been treated as an expense when provided to the child. There is nowhere on the form to report the unpaid services as there is no loss.