Discussion Archives:Business bad debt question

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Discussion Forum Index --> Advanced Tax Questions --> Business bad debt question

Discussion Forum Index --> Tax Questions --> Business bad debt question

Panda (talk|edits) said:

5 April 2008
An LLC was formed to loan money to an operating business. The LLC receives interest from the operating business on the loan and then reports interest income on everyone's K-1s and distributions when paid out. The operating business goes under so we have a outstanding loan to write off. The only purpose of the LLC was to provide this loan, they have had no operating income or expenses. Can we write this loan off as a business bad debt or must it be a non business bad debt? Your thoughts are appreciated.

Nancyshoemake (talk|edits) said:

5 April 2008
non business bad debt. the below comes from irs topic 453

There are two kinds of bad debts – business and nonbusiness. A business bad debt, generally, is one that comes from operating your trade or business. A business deducts its bad debts from gross income when figuring its taxable income. Business bad debts may be deducted in part or in full.

All other bad debts are nonbusiness. Nonbusiness bad debts must be totally worthless to be deductible. You cannot deduct a partially worthless nonbusiness bad debt. You must establish that you have taken reasonable steps to collect the debt and the debt is worthless. It is not necessary to go to court if you can show that a judgment from the court would be uncollectible. You may take the deduction only in the year the debt becomes worthless. A debt becomes worthless when the surrounding facts and circumstances indicate there is no longer any chance the amount owed will be paid. You do not have to wait until a debt is due to determine whether it is worthless.

A nonbusiness bad debt is reported as a short–term capital loss in Part 1 on Form 1040, Schedule D (PDF). It would be subject to the capital loss limitations. A nonbusiness bad debt deduction requires a separate detailed statement attached to your return.

WPCPA (talk|edits) said:

5 April 2008
Panda - fill in some info on you, OK?

Etnacpa (talk|edits) said:

8 January 2009
If LLC elected to be corp,

looks like IRC 1244 loss, RIA I-9501 Illustrations say get 1244 ordinary loss even tho underlying asset is capital, eg stocks, bonds.

Xenon16 (talk|edits) said:

9 January 2009
If the LLC was in the business of providing loans, it would seem deductible. The case in hand would appear to be in the business of making loans, however, it only issued one loan in the course of its business life and it was to a related party. I would suggest that if you deduct, be sure to disclose your tax position. It may be a gray area, but the tax court would be unlikely to rule favorably for the taxpayer.
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