According to the IRS, if someone owes you money and you reasonably expect to not be able to get it. you can take the bad debt deduction. There are requirements:
* You must have previously included the amount in your income or loaned out your cash. If you are a cash basis taxpayer, as most individuals are, you may not take a bad debt deduction for money you expected to receive but did not (for example, for money owed to you for services performed, or rent) because that amount was never included in your income. For a bad debt, you must show that there was an intention at the time of the transaction to make a loan and not a gift. If you lend money to a relative or friend with the understanding that it may not be repaid, it is considered a gift and not a loan.
* You must be able to show that you made a reasonable attempt to collect the debt. This doesn't mean you have to go to court, but you do have to document some effort on your part to get the money.
You can use Schedule D to claim the deduction. You can also get more info from IRS publication 550 (Investment income and expenses) or Publication 535 (Business expenses).