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Posted by Bill Brown on November 24, 2006, 2:08 am
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BobG wrote:
> Unfortunately, I'm owed a substantial amount as an unsecured
> creditor of an entity which is currently in Chapter 11.
> Even more unfortunately, the loan is a "non-business" debt.
>
> It turns out that the unsecured creditors are likely to get
> recoveries of 5-10% of their claim amounts.
>
> My understanding is that, if the loan turns out to be
> completely worthless, I would be able to take a "nonbusiness
> bad debt deduction" and treat my loss as a capital loss. If
> I get even a single cent of recovery, there's no tax
> deduction. Does this sound right?
You don't quite have the rule right. You cannot deduct a
non-business bad debt until the unpaid balance on the
receivable is worthless. Once you receive that 5-10% and the
bankruptcy referee says that's all there is going to be,
THEN you have a reportable short-term capital loss of the
unpaid portion.
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Posted by Mike20878 on November 27, 2006, 6:15 pm
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dpb wrote:
> ...
>
> The way I read Pub 17 and 550 on non-business bad debts, the
> "totally worthless" section applies only so long as there is
> any reasonable possibility of any repayment. Once there is
> a payout from the bankruptcy, my interpretation would be
> that the note at that time really does become totally
> worthless and the remaining balance can be deducted as a
> short-term capital loss in the tax year that occurs. That,
> of course, assumes that all the other provisions making it a
> valid loan are met.
Since when is a non-business bad debt deductible? If no
income was reported on a prior return for the receivable -
which would be the case with a non-business (i.e. personal)
receivable or loan - then there is no deduction when the
receivable/loan becomes uncollectable. Am I off here?
<< ======================================================= >>
<< The foregoing was not intended or written to be used, >>
<< nor can it used, for the purpose of avoiding penalties >>
<< that may be imposed upon the taxpayer. >>
<< >>
<< The Charter and the Guidelines for submitting posts >>
<< to this newsgroup as well as our anti-spamming policy >>
<< are at www.asktax.org. >>
<< Copyright (2006) - All rights reserved. >>
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Posted by Seth Breidbart on November 28, 2006, 9:22 pm
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> Since when is a non-business bad debt deductible? If no
> income was reported on a prior return for the receivable -
> which would be the case with a non-business (i.e. personal)
> receivable or loan - then there is no deduction when the
> receivable/loan becomes uncollectable. Am I off here?
Yes.
You lend a "friend" $5,000. It's a personal loan, not a
business transaction. But that $5,000 was earned by you at
some time, and you paid taxes on the earnings.
Seth
<< ======================================================= >>
<< The foregoing was not intended or written to be used, >>
<< nor can it used, for the purpose of avoiding penalties >>
<< that may be imposed upon the taxpayer. >>
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<< The Charter and the Guidelines for submitting posts >>
<< to this newsgroup as well as our anti-spamming policy >>
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<< Copyright (2006) - All rights reserved. >>
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Posted by Phil Marti on November 28, 2006, 9:22 pm
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> Since when is a non-business bad debt deductible?
At least since 1971. See IRS Publication 550.
--
Phil Marti
Clarksburg, MD
<< ======================================================= >>
<< The foregoing was not intended or written to be used, >>
<< nor can it used, for the purpose of avoiding penalties >>
<< that may be imposed upon the taxpayer. >>
<< >>
<< The Charter and the Guidelines for submitting posts >>
<< to this newsgroup as well as our anti-spamming policy >>
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<< Copyright (2006) - All rights reserved. >>
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Posted by Paul Thomas, CPA on November 28, 2006, 9:22 pm
Please log in for more thread options > dpb wrote:
>> The way I read Pub 17 and 550 on non-business bad debts, the
>> "totally worthless" section applies only so long as there is
>> any reasonable possibility of any repayment. Once there is
>> a payout from the bankruptcy, my interpretation would be
>> that the note at that time really does become totally
>> worthless and the remaining balance can be deducted as a
>> short-term capital loss in the tax year that occurs. That,
>> of course, assumes that all the other provisions making it a
>> valid loan are met.
> Since when is a non-business bad debt deductible? If no
> income was reported on a prior return for the receivable -
> which would be the case with a non-business (i.e. personal)
> receivable or loan - then there is no deduction when the
> receivable/loan becomes uncollectable. Am I off here?
You're off a little. There must be a valid debt, so no
deductions for "loans" to your dependent kids that they
never repaid (da bums), monies paid to, and the example in
Pub 550 (I believe), a contractor who goes belly-up without
doing the work or repaying the deposit can be counted as a
non-business bad-debt, deductible on Schedule D as a
short-term capital loss.
The fact that they listed you as a creditor in their
bankruptcy seals the deal as far as proving the amount and
the debt as legit as well as uncollectible,
Now, the year in which you took the deduction may be
questionable, for say a construction loan made today and a
contractor who files bankruptcy in 2007, that doesn't get
cleared through the courts till 2008. I'd want to take it
as early as possible, so maybe if you knew about the
bankruptcy before filing the 2006 returns, take it there,
else the earliest you "knew" it wouldn't be collected (or
the work completed) was in 2007 when he filed on you.
If in a later year he "found God" and repaid you, then
report it as income.
--
Paul Thomas, CPA
paulthomascpapc@bellsouth.net
<< ======================================================= >>
<< The foregoing was not intended or written to be used, >>
<< nor can it used, for the purpose of avoiding penalties >>
<< that may be imposed upon the taxpayer. >>
<< >>
<< The Charter and the Guidelines for submitting posts >>
<< to this newsgroup as well as our anti-spamming policy >>
<< are at www.asktax.org. >>
<< Copyright (2006) - All rights reserved. >>
<< ======================================================= >>
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