Discussion:Nonbusiness bad debt for 2006 - personal

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Discussion Forum Index --> Tax Questions --> Nonbusiness bad debt for 2006 - personal

Wkstaxprep (talk|edits) said:

3 March 2007
i have a client who ha a very large capital gain for 2006. He also advised me that he would like to write off 2 separate personal loans to former friends who he does not foresee being paid back totalling over $100,000.

My 2 qyuestiions are

1.) before i use the $100,000 in nonbusiness bad debt to offset some of the capital gains, what kind of documentation should i get from cleint so i feel comfortable about the transaction?

2.) doesn't the taxpayer have to issue 1099-C's to his former friends for cancellation of debt? and since we're in march now the fromer friends may already hae filed their return.

can anyone advise me on this.

Happy saturday to everyone, are we allowed to relax on the weekend or not ? double edged sword i guess :)



Death&Taxes (talk|edits) said:

3 March 2007
I don't know the answer to the second question, but suspect you have to be in the business of lending money to do so.

The first question can be reduced down to his efforts to collect, and what the collection effort is based upon: a signed note which can be reduced to a judgment. Did he involve a lawyer [though people can always get lawyers to write them letters saying collection is not possible for various reasons]. For the amounts you are talking about, in my opinion these debts smell like old fish.

Wkstaxprep (talk|edits) said:

3 March 2007
so you would recommend taking the bad debt loss as a short term capital loss and not issue 1099's ? am i reading you correctly.

thank you, you have been helpful a number of times, i hope i can return the gestures in the future.


Blrgcpa (talk|edits) said:

3 March 2007
Sounds like a personal loss which would not be deductible, unless a 1099c goes along with it to substantiate it. What type of collection efforts were made to collect the debt?

Wkstaxprep (talk|edits) said:

3 March 2007
taxpayer lent money,received a signed letter with payemtn terms and has sepnt a few eyars trying to collect and has resigned to fact that will not be collected.

are you saying its a personal loss and not deductible at all ?

that's not my understanding according to the irs website

Wkstaxprep (talk|edits) said:

3 March 2007
per irs website:

Nonbusiness Bad Debts If someone owes you money that you cannot collect, you have a bad debt. You may be able to deduct the amount owed to you when you figure your tax for the year the debt becomes worthless.

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 and is deductible as a business loss. All other bad debts are nonbusiness bad debts and are deductible as short-term capital losses.


An architect made personal loans to several friends who were not clients. She could not collect on some of these loans. They are deductible only as nonbusiness bad debts because the architect was not in the business of lending money and the loans do not have any relationship to her business.

Business bad debts. For information on business bad debts of an employee, see Publication 529. For information on other business bad debts, see chapter 10 of Publication 535.

Deductible nonbusiness bad debts. To be deductible, nonbusiness bad debts must be totally worthless. You cannot deduct a partly worthless nonbusiness debt.

Death&Taxes (talk|edits) said:

3 March 2007
If the debt is legitimate, and this sounds like there is substantion to back it up, then there would be a write-off. I do feel at least he should consult a lawyer....who wants to offset 15% money with the loss if there is a remote possibility a ball-breaking lawyer can get it back.

I had a client write off one of these after unsuccessful legal attempts which resulted in a bankruptcy and discharge, or about 70% of it over the years, when the debtor, near death, sent him the money saying he wanted to die at peace. My client wanted to call it a gift.

Chautauqua (talk|edits) said:

3 March 2007

Yes, I would take it as a capital loss (long term if over one year), and the taxpayer should have substantial documentation showing a significant effort to collect. I would not issue a 1099-C as this would signal the debtor that you have given up on collection. You may have given up, but don't tell the debtor.

Bottom Line (talk|edits) said:

3 March 2007
My understanding is that a 1099-C cannot be issued since the lender is not in the business of lending money. The instructions for 1099-C for who must file only list financial institutions and the post office.

JR1 (talk|edits) said:

March 3, 2007
Will, it's legit non biz bad debt. Do as suggested...he must make every effort to collect the debt and have basis for belief that it is not collectible.

Wkstaxprep (talk|edits) said:

3 March 2007
Excellent points, however Chaut, i believe its short term cap loss, date of sale 12-31-06 either way you look at it.

that's how nonbuss bad dedt is reported, as a ST Cap loss, it should be treated please correct me if i am wrong (which i am many times, lol)

Jokadah (talk|edits) said:

3 March 2007
"Happy saturday to everyone, are we allowed to relax on the weekend or not?" No, we do not get to relax on the weekend, it's seven days a week until the 16th and then we get to dive into a very large pomegranate martini.

But I do have a question about this. So what happens if he does hire an aggressive attorney and gets the money back? Since he took it as a loss will he then have to show it as a gain. And . . . what the heck does this guy do that he can lend that kind of money and walk away when it's not paid back? If IRS audits they may ask those same questions.

JR1 (talk|edits) said:

March 3, 2007
I think the code and regs clearly require the hiring of the aggressive attorney first, and then, if unsuccessful, taking the debt loss.

Deback (talk|edits) said:

March 3, 2007
I agree with Bottom Line. He would not file a 1099-C. Also, the code and regs don't clearly require the hiring of an agressive attorney. He would not have to hire an attorney to try to collect the debt. He just needs to show that legal action to collect would probably not result in payment of any part of the debt.

Ex-IRS (talk|edits) said:

4 March 2007
Nonbusiness bad debts are claimed in the year that they became totally worthless.

If you did not include the nonbusiness bad debt on your original return and the due date has already passed, then file the claim on 1040X within 7 years from the date your original return for that year had to be filed or 2 years from the date you paid the tax, whichever is later.

All nonbusiness bad debts are short term losses claimed on Schedule D, Part 1 and are subject to the capital loss limitations.

On Schedule D, Part I, line 1, enter the name of the debtor and “statement attached” in column (a). Enter the amount of the bad debt in parentheses in column (f). Use a separate line for each bad debt.

 For each bad debt, attach a statement to your return that contains:
  • A description of the debt, including the amount, and the date it became due,
  • The name of the debtor, and any business or family relationship between you and the debtor,
  • The efforts you made to collect the debt, and
  • Why you decided the debt was worthless. For example, you could show that the borrower has declared bankruptcy, or that legal action to collect would probably not result in payment of any part of the debt.

The discharged debt is clearly income to the debtor and if the debtor is an individual it should be reported on Form 1040, Line 21 (Sec. 108).

Only Federal Government agencies, financial institutions, credit unions and any organization that has a significant trade or business of which is the lending of money are required to file Form 1099-C (Sec. 6050P and T.D. 9160, final regulations on Sec. 6050P).

Wkstaxprep (talk|edits) said:

5 March 2007
Ex-IRS , very well stated and helpful. thanks for taking the time


Kirthe (talk|edits) said:

11 January 2008
To revive this thread, I have a question about issuing a 1099-C to someone from whom I incurred a personal bad debt.

I will write it off, but while Ex-IRS lists who are required to file 1099-C, can't I do it as well, to stick it to him?

TxSrv (talk|edits) said:

11 January 2008
"...to file 1099-C, can't I do it as well, to stick it to him?"

Filing a 1099-C could backfire on you, if there's any degree of argument the loan was not at arm's length. The debtor sues you following IRS compliance action, since the 1099-C was not required. Or IRS sets you both up for add'l tax as "whipsaw cases," until appeals or litigation determines what the correct treatment is.

Chase (talk|edits) said:

11 October 2009
For the non-business bad debts, does the taxpayer follow the same procedure as Ex-IRS points out when the bad debt resulted from a loan to someone who lives overseas?

Larryfred (talk|edits) said:

15 October 2009
Form 1099-C does not have anything to do with a bad debt that you cannot collect. It only has to do with a debt that you have forgiven. Further, it may not even apply in a case of debt that you have forgiven unless you are a lending institution. Arguably a private individual who forgives a personal debt has made a gift and could be subject to a gift tax return....NO 1099-C...However, the loss if fully deductible on SCH D and subject to the same rules as all other capital losses.

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