Tax Quiz: Bad Debt Deductions

 Q. You lent a friend $1,000, putting the loan terms in writing, but the debt was never repaid. You sent several demands in writing. Do you get a deduction?
 a. No. Loans between friends and family members are nondeductible gifts.
 b. Yes — a $1,000 theft loss deduction since your money was stolen.
 c. Yes — a business expense deduction because you’re in the loan business.
 d. Yes — a short-term capital loss on Schedule D.
 

The answer is d

Although the IRS is suspicious of loans between friends and family members, you are allowed to take a bad debt deduction as a short-term capital loss for a legitimate transaction. You must be able to prove that the loan was valid and that you made serious attempts to collect the money. Ask your tax adviser for more information on how to set up the deal.

© Copyright 2014. Thompson Reuters.  All rights reserved. Brought to you by: Gordon Advisors, P.C.
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