A taxpayer collects a debt that was previously written off as a bad debt. What tax consequences arise if the recovery is received in a subsequent tax year?

A. When a taxpayer collects a bad debt that was previously written off and deducted, the recovery must be reported as an increase in cash and a decrease in expense. This removes the bad debt deduction that was reported in the prior year.

B. When a taxpayer collects a bad debt that was previously written off and deducted, the recovery must be reported in income to the extent the taxpayer received a tax benefit from the deduction in the prior year.

C. When a taxpayer collects a bad debt that was previously written off and deducted, the recovery must be reported as a decrease in liabilities and a decrease in receivables. The debt recovery removes the bad debt liability sitting on the books as well as the receivable that is now collected.

D. When a taxpayer collects a bad debt that was previously written off and deducted, the recovery must be reported as a decrease in receivables and an increase in cash. The debt recovery amount will not affect income for the year because the amount was previously included when the sale occurred.