(a) Worthless debts — Arkansas Code § 26-51-425.

1. (1)

   1. (A) Where a debt is worthless, either wholly or in part, the amount that is worthless and charged off or written down to a nominal amount on the books of the taxpayer shall be allowed as a deduction in computing net income.
   2. (B) There shall accompany the return a statement showing the propriety of any deduction claimed for bad debts.
   3. (C) Before a taxpayer may charge off and deduct a debt in part, he or she must ascertain and be able to demonstrate with a reasonable degree of certainty the amount that is uncollectible.
   4. (D) An amount subsequently received on account of a bad debt previously charged off and allowed as a deduction for income tax purposes must be included in gross income in the tax year in which received.

2. (2)

   1. (A) Bankruptcy of the debtor is generally an indication of the worthlessness of at least part of an unsecured and unpreferred debt.
   2. (B) Actual determination of worthlessness in bankruptcy cases is sometimes possible before and, at other times, only when settlement in bankruptcy has been made.
   3. (C) Where a taxpayer ascertained a debt to be worthless and charged it off in one (1) tax year, the fact that the debtor's bankruptcy proceedings are terminated in a later tax year (confirming that the debt is worthless) will not authorize shifting the deduction to such later tax year.
   4. (D) If a taxpayer computes its income upon the basis of valuing its notes or accounts receivable at their fair market value when received (which may be less than their face value), the amount deductible as a bad debt is limited to such original valuation.

3. (3)

   1. (A) Worthless debts arising from unpaid wages, salaries, rents, and similar items of taxable income will not be allowed as a deduction unless such items have been entered as income in the books of the taxpayer in a prior tax year or in the tax year in which the deduction was made.
   2. (B) Only the difference between the amount received in distribution of the assets of a bankruptcy and the amount of the claim may be deducted as a bad debt.
   3. (C) The difference between the amount received by a creditor of a decedent in distribution of the assets of the decedent's estate and the amount of the creditor's claim may be considered a worthless debt.
   4. (D) A purchaser of uncollectible accounts receivable that are subsequently charged off the purchaser's books as bad debts is entitled to deduct them, the amount of the deduction to be based upon the price actually paid for the accounts receivable and not upon their face value.

(b) Sale of mortgaged or pledged property — Arkansas Code § 26-51-425.

1. (1) Where mortgaged or pledged property is sold for less than the amount of the debt and the mortgagee or pledgee determines that the portion of the debt remaining unsatisfied after such sale is uncollectible and charges it off, such amount may be deducted as a bad debt for the tax year in which it is determined to be worthless and charged off.
2. (2) Accrued interest may be included as part of the deduction only when it has previously been reported as income.

(c) Bonds and other similar obligations — Arkansas Code § 26-51-425.

1. (1)

   1. (A) Bonds, when determined to be worthless, may be treated as bad debts to the amount actually paid for them.
   2. (B) Bonds of an insolvent corporation secured only by a mortgage from which, on foreclosure, nothing is realized for the bondholders are regarded as worthless no later than the tax year of the foreclosure sale.
   3. (C) No deduction for a bad debt is allowable in computing a bondholder's income for any subsequent tax years.

2. (2)

   1. (A) A taxpayer (other than a dealer in securities) possessing debts evidenced by bonds or other similar obligations cannot deduct from gross income any losses on account of market fluctuations that occur prior to maturity of the debt instruments.
   2. (B) However, when a taxpayer determines upon maturity that it will recover none or only a part of the debt evidenced by the bonds or other similar obligations, the taxpayer may deduct the uncollectible part of such debt.
   3. (C) In order for this deduction to be properly taken, the taxpayer must include with its return an explanation or other proof that substantiates the deduction.