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Non Business Bad Debts


If you've made a personal (not a business loan) loan to someone such as a family member, co-worker, or friend, and are not able to collect the money, you have a non-business bad debt.

Note: If you lend money to anyone with the understanding that they do not have to repay you, you must consider it as a gift and not as a loan, and you may not deduct it as a bad debt. As a gift, you must follow the federal tax rules for gifts.

Non business bad debts are treated as a short-term capital loss on Form 8949, Sale of Other Dispositions of Capital Assets, Part 1, Line 1. Enter the name of the debtor and "bad debt statement attached" in column (a). Enter your basis in the bad debt in column (e). Enter zero in column (d). Use a separate line for each bad debt.

The deduction is subject to the capital loss limitation.

The following rules apply in order to take a short-term capital loss deduction:

1-The debt must be TOTALLY WORTHLESS. You can't deduct a partically worthless nonbusiness bad debt. A debt becomes totally worthless when the surrounding facts and circumstances indicate there's no reasonable expectation that the debt wil be repaid. To show that a debt is totally worthless, you must establish that you've taken reasonable steps to collect the debt. It's not necessary to go to court if you can show that a judgment from the court would be uncollectible.

2-You may take the deduction only in the year  the debt becomes totally worthless. You don't have to wait until the debt is due to determine that it's totally worthless.

3-A non-business bad debt requires a separate detailed statement attached to your tax return. The statement MUST contain:

(a) a description of the debt

(b) the amount of the debt

(c) the date it became due

(d) the name of the debtor

(e) any business or family relationship between you and the debtor

(f) the efforts you made to collect the debt,

(g) why you decided the debt was now totally worthless.

Be sure your attached statement has your name, complete address, Social Security Number, Tax Year, Tax Form, and says "Attached Statement" at the top.

CALL NOW 561-746-1926 or 561-339-8102 if you have any questions or concerns or would like to schedule a FREE, Confidential, No-Obligation Tax-Saving Consultation.