Internal Revenue Code · 26 U.S.C.
§ 166. Bad debts
Official text, no changes From the Office of the Law Revision Counsel, release point 119-121 (current through Public Law 119-121 (October 9, 2026)). Compare it with the official text at uscode.house.gov (external site).
Cite as 26 U.S.C. § 166
At a glance
Read from the text, the source credit and the official notes. Not part of the law.
- Status
- In force
- Enacted
- September 2, 1958 by Pub. L. 85–866
- Last amended
- November 10, 1988 by Pub. L. 100–647
- Amendments
- 6 dated changes in the source credit
- Length
- 6 subsections · 415 words · about 2 min to read
- Defines
- 1 term
- Cross-references
- cites 5; cited by 9 Code sections and 26 other regulations
- Regulations
- 10 issued under this section
There shall be allowed as a deduction any debt which becomes worthless within the taxable year.
When satisfied that a debt is recoverable only in part, the Secretary may allow such debt, in an amount not in excess of the part charged off within the taxable year, as a deduction.
For purposes of subsection (a), the basis for determining the amount of the deduction for any bad debt shall be the adjusted basis provided in section 1011 for determining the loss from the sale or other disposition of property.
This section shall not apply to a debt which is evidenced by a security as defined in section 165(g)(2)(C).
(Aug. 16, 1954, ch. 736, 68A Stat. 50; Pub. L. 85–866, title I, § 8, Sept. 2, 1958, 72 Stat. 1608; Pub. L. 89–722, § 1(a), Nov. 2, 1966, 80 Stat. 1151; Pub. L. 91–172, title IV, § 431(c)(1), Dec. 30, 1969, 83 Stat. 619; Pub. L. 94–455, title VI, § 605(a), title XIV, § 1402(b)(1)(A), (2), title XIX, § 1906(b)(13)(A), Oct. 4, 1976, 90 Stat. 1575, 1731, 1732, 1834; Pub. L. 98–369, div. A, title X, § 1001(b)(1), (e), July 18, 1984, 98 Stat. 1011, 1012; Pub. L. 99–514, title VIII, § 805(a), (b), title IX, § 901(d)(4)(A), Oct. 22, 1986, 100 Stat. 2361, 2379; Pub. L. 100–647, title I, § 1008(d)(1), (2), Nov. 10, 1988, 102 Stat. 3439.)
Terms defined here
Where the text says “the term … means”. Select a term to jump to its definition.
Regulations under this section
Treasury regulations (26 CFR) issued under § 166
- § 1.166-1 Bad debts.
- § 1.166-2 Evidence of worthlessness.
- § 1.166-3 Partial or total worthlessness.
- § 1.166-4 Reserve for bad debts.
- § 1.166-5 Nonbusiness debts.
- § 1.166-6 Sale of mortgaged or pledged property.
- § 1.166-7 Worthless bonds issued by an individual.
- § 1.166-8 Losses of guarantors, endorsers, and indemnitors incurred on agreements made before January 1, 1976.
- § 1.166-9 Losses of guarantors, endorsers, and indemnitors incurred, on agreements made after December 31, 1975, in taxable years beginning after such date.
- § 1.166-10 Reserve for guaranteed debt obligations.
Cross-references
Computed from the citations in the text of Title 26 and 26 CFR.
This section cites 5 other sections
- § 1011 Adjusted basis for determining gain or loss
- § 805(a) General deductions
- § 165(g)(2)(C) Losses
- § 271 Debts owed by political parties, etc.
- § 582 Bad debts, losses, and gains with respect to securities held by financial institutions
Cited by 9 Code sections
- § 108(e)(7)(A)(ii)(I) Income from discharge of indebtedness
- § 165(l)(7) Losses
- § 271(a) Debts owed by political parties, etc.
- § 582(a) Bad debts, losses, and gains with respect to securities held by financial institutions
- § 585(a)(1) Reserves for losses on loans of banks
- § 593(a)(1)(C) Reserves for losses on loans
- § 1351(b) Treatment of recoveries of foreign expropriation losses
- § 1367(b)(3) Adjustments to basis of stock of shareholders, etc.
- § 6511(d)(1)(A) Limitations on credit or refund
Cited in 26 regulations not issued under it
- § 1.57-1 Items of tax preference defined.
- § 1.165-5 Worthless securities.
- § 1.172-9 Election with respect to portion of net operating loss attributable to foreign expropriation loss.
- § 1.262-1 Personal, living, and family expenses.
- § 1.271-1 Debts owed by political parties.
- § 1.367(d)-1T Transfers of intangible property to foreign corporations (temporary).
- § 1.446-1 General rule for methods of accounting.
- § 1.448-3 Nonaccrual of certain amounts by service providers.
- § 1.451-1 General rule for taxable year of inclusion.
- § 1.582-1 Bad debts, losses, and gains with respect to securities held by financial institutions.
- § 1.585-1 Reserve for losses on loans of banks.
- § 1.585-2 Addition to reserve.
- § 1.585-3 Special rules.
- § 1.585-5 Denial of bad debt reserves for large banks.
- § 1.585-7 Elective cut-off method of changing from the reserve method of section 585.
- § 1.809-6 Modifications.
- § 1.860C-2 Determination of REMIC taxable income or net loss.
- § 1.865-1 Loss with respect to personal property other than stock.
- § 1.1038-1 Reacquisitions of real property in satisfaction of indebtedness.
- § 1.1038-2 Reacquisition and resale of property used as a principal residence.
- § 1.1222-1 Other terms relating to capital gains and losses.
- § 1.1374-4 Recognized built-in gain or loss.
- § 1.1502-13 Intercompany transactions.
- § 1.6655-2 Annualized income installment method.
Amendment history
From the source credit and the official notes, newest first.
- Amended by Pub. L. 100–647Parts changed in 1988: (d)(1)(A) (f)
- Amended by Pub. L. 99–514Parts changed in 1986: (c) (f) (g)
- Amended by Pub. L. 98–369Parts changed in 1984: (d)(1)(B)
- Amended by Pub. L. 94–455Parts changed in 1976: (a)(2) (d)(1)(B) (f) (g)
- Amended by Pub. L. 91–172Parts changed in 1969: (h)(4)
- Amended by Pub. L. 89–722Parts changed in 1966: (g)
- Enacted by Pub. L. 85–866Parts changed in 1958: (d)(2)(A)
Where it sits in the Code
- Subtitle A Income Taxes
- Chapter 1 NORMAL TAXES AND SURTAXES
- Subchapter B Computation of Taxable Income
- Part VI ITEMIZED DEDUCTIONS FOR INDIVIDUALS AND CORPORATIONS
Nearby sections
Official notes
Show the Law Revision Counsel's notes (amendments, effective dates)
Editorial Notes
Amendments
1988—Subsec. (d)(1)(A). Pub. L. 100–647, § 1008(d)(1), substituted “subsection (a)” for “subsections (a) and (c)”.
Subsecs. (f), (g). Pub. L. 100–647, § 1008(d)(2), made clarifying amendment to directory language of Pub. L. 99–514, § 805(b), see 1986 Amendment note below.
1986—Subsec. (c). Pub. L. 99–514, § 805(a), struck out subsec. (c), reserve for bad debts, which read as follows: “In lieu of any deduction under subsection (a), there shall be allowed (in the discretion of the Secretary) a deduction for a reasonable addition to a reserve for bad debts.”
Subsec. (f). Pub. L. 99–514, § 805(b), as amended by Pub. L. 100–647, § 1008(d)(2), redesignated subsec. (g) as (f) and struck out former subsec. (f) which related to reserve for certain guaranteed debt obligations, par. (1) thereof providing for allowance of deduction, par. (2) disallowing deduction in other cases, par. (3) relating to opening balance of reserve, and par. (4) relating to suspense account.
Subsec. (g). Pub. L. 99–514, § 805(b), as amended by Pub. L. 100–647, § 1008(d)(2), redesignated subsec. (g) as (f).
Pub. L. 99–514, § 901(d)(4)(A), struck out pars. (3) and (4) which read as follows:
“(3) For special rule for bad debt reserves of certain mutual savings banks, domestic building and loan associations, and cooperative banks, see section 593.
“(4) For special rule for bad debt reserves of banks, small business investment-companies, etc., see sections 585 and 586.”
1984—Subsec. (d)(1)(B). Pub. L. 98–369 substituted “6 months” for “1 year”, applicable to property acquired after June 22, 1984, and before Jan. 1, 1988. See Effective Date of 1984 Amendment note below.
1976—Subsecs. (a)(2), (c). Pub. L. 94–455, § 1906(b)(13)(A), struck out “or his delegate” after “Secretary”.
Subsec. (d)(1)(B). Pub. L. 94–455, § 1401(b)(1)(A), (2), provided that “6 months” would be changed to “9 months” for taxable years beginning in 1977, and “9 months” would be changed to “1 year” for taxable years beginning after Dec. 31, 1977.
Subsec. (f). Pub. L. 94–455, §§ 605(a), 1906(b)(13)(A), redesignated subsec. (g) as (f) and struck out “or his delegate” after “Secretary” in pars. (1), (3) and (4)(D). Former subsec. (f), which related to treatment of payments made by guarantors of certain noncorporate obligations, was struck out.
Subsecs. (g), (h). Pub. L. 94–455, § 605(a), redesignated subsecs. (g) and (h) as (f) and (g), respectively.
1969—Subsec. (h)(4). Pub. L. 91–172 added par. (4).
1966—Subsecs. (g), (h). Pub. L. 89–722 added subsec. (g) and redesignated former subsec. (g) as (h).
1958—Subsec. (d)(2)(A). Pub. L. 85–866 substituted “a trade or business of the taxpayer” for “a taxpayer’s trade or business”.
Statutory Notes and Related Subsidiaries
Effective Date of 1988 Amendment
Amendment by Pub. L. 100–647 effective, except as otherwise provided, as if included in the provision of the Tax Reform Act of 1986, Pub. L. 99–514, to which such amendment relates, see section 1019(a) of Pub. L. 100–647, set out as a note under section 1 of this title.
Effective Date of 1986 Amendment
Pub. L. 99–514, title VIII, § 805(d), Oct. 22, 1986, 100 Stat. 2362, provided that:
“(1) In general.— The amendments made by this section [amending this section and sections 81, 108, 461, and 805 of this title] shall apply to taxable years beginning after December 31, 1986.“(2) Change in method of accounting.— In the case of any taxpayer who maintained a reserve for bad debts for such taxpayer’s last taxable year beginning before January 1, 1987, and who is required by the amendments made by this section to change its method of accounting for any taxable year—“(A) such change shall be treated as initiated by the taxpayer,“(B) such change shall be treated as made with the consent of the Secretary, and“(C) the net amount of adjustments required by section 481 of the Internal Revenue Code of 1986 to be taken into account by the taxpayer shall—“(i) in the case of a taxpayer maintaining a reserve under section 166(f), be reduced by the balance in the suspense account under section 166(f)(4) of such Code as of the close of such last taxable year, and“(ii) be taken into account ratably in each of the first 4 taxable years beginning after December 31, 1986.”
Pub. L. 99–514, title IX, § 901(e), Oct. 22, 1986, 100 Stat. 2380, provided that: “The amendments made by this section [amending this section and sections 172, 291, 582, 585, 593, 596, 856, 1277, and 1361 of this title and repealing section 586 of this title] shall apply to taxable years beginning after December 31, 1986.”
Effective Date of 1984 Amendment
Pub. L. 98–369, div. A, title X, § 1001(e), July 18, 1984, 98 Stat. 1012, provided that: “The amendments made by this section [amending this section and sections 341, 402, 403, 423, 582, 584, 631, 642, 702, 818, 852, 856, 857, 1222, 1223, 1231, 1232, 1233, 1234, 1235, 1246, 1247, 1248, 1251, and 1278 of this title] shall apply to property acquired after June 22, 1984, and before January 1, 1988.”
Effective Date of 1976 Amendment
Pub. L. 94–455, title VI, § 605(c), Oct. 4, 1976, 90 Stat. 1575, provided that: “The amendments made by this section [amending this section and section 81 of this title] shall apply to guarantees made after December 31, 1975, in taxable years beginning after such date.”
Pub. L. 94–455, title XIV, § 1402(b)(1), Oct. 4, 1976, 90 Stat. 1731, provided that the amendment made by that section is effective with respect to taxable years beginning in 1977.
Pub. L. 94–455, title XIV, § 1402(b)(2), Oct. 4, 1976, 90 Stat. 1732, provided that the amendment made by that section is effective with respect to taxable years beginning after Dec. 31, 1977.
Effective Date of 1969 Amendment
Amendment by Pub. L. 91–172 applicable to taxable years beginning after July 11, 1969, see section 431(d) of Pub. L. 91–172, set out as an Effective Date note under section 585 of this title.
Effective Date of 1966 Amendment
Pub. L. 89–722, § 2, Nov. 2, 1966, 80 Stat. 1152, as amended by Pub. L. 99–514, § 2, Oct. 22, 1986, 100 Stat. 2095, provided that:
“(a) Except as provided in subsections (b) and (c), the amendments made by the first section of this Act [amending this section and section 81 of this title] shall apply to taxable years ending after October 21, 1965.“(b) If—“(1) the taxpayer before October 22, 1965, claimed a deduction, for a taxable year ending before such date, under section 166(c) of the Internal Revenue Code of 1986 [formerly I.R.C. 1954] for an addition to a reserve for bad debts on account of debt obligations described in section 166(g)(1)(A) of such Code (as amended by the first section of this Act), and“(2) the assessment of a deficiency of the tax imposed by chapter 1 of such Code for such taxable year and each subsequent taxable year ending before October 22, 1965, is not prevented on December 31, 1966, by the operation of any law or rule of law,then such deduction on account of such debt obligations shall be allowed for each such taxable year under such section 166(c) to the extent that the deduction would have been allowable under the provisions of such section 166(g)(1)(A) if such provisions applied to such taxable years.“(c) Section 166(g)(2) of the Internal Revenue Code of 1986 (as amended by the first section of this Act) shall apply to taxable years beginning after December 31, 1953, and ending after August 16, 1954.”
Effective Date of 1958 Amendment
Amendment by Pub. L. 85–866 applicable to taxable years beginning after Dec. 31, 1953, and ending after Aug. 16, 1954, see section 1(c)(1) of Pub. L. 85–866, set out as a note under section 165 of this title.
Establishment of Reserve for Taxable Year Ending After Oct. 21, 1965, and Beginning Before Aug. 2, 1966
Pub. L. 89–722, § 1(c), Nov. 2, 1966, 80 Stat. 1152, as amended by Pub. L. 99–514, § 2, Oct. 22, 1986, 100 Stat. 2095, provided that: “If the taxpayer establishes a reserve described in section 166(g)(1) of the Internal Revenue Code of 1986 [formerly I.R.C. 1954] (as amended by subsection (a) of this section) for a taxable year ending after October 21, 1965, and beginning before August 2, 1966, the establishment of such reserve shall not be considered as a change in method of accounting for purposes of section 446(e) of such Code.”