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Question to a Tax Expert I gave a short term loan of $50,000

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Question to a Tax Expert
I gave a short term loan of $50,000 to a friend in Uruguay last year. A local lawyer did the loan agreement. Unfortunately, the borrower defaulted and my lawyer filed a collection case to recover whatever we can. We could not recover anything because the borrower disappeared.
1. How can I write this off as a bad debt ?
2. Can I claim any deduction from my income tax 2012?
3. What documents do I need to do #1 & #2
Thank you

TheLegalistEsq :

I will be assisting you. Let me review your question.

Customer: I still waiting for an answer from you.
Hello: I will try to assist with this question. The loan must be proved to have been made. That is, you must be able to prove that money that you loaned from money that you had on hand, and the person was a non-related person. Then you must prove that you have attempted collection and there is no chance of recovering your money. Here is an excerpt from "Tax Topics" published by the IRS.There are two kinds of bad debts – business and nonbusiness.Generally, a business bad debt is one that comes from operating your trade or business. The following are examples of business bad debts (if previously included in income): •Loans to clients and suppliers•Credit sales to customers, or•Business loan guaranteesA business deducts its bad debts from gross income when figuring its taxable income. Business bad debts may be deducted in part or in full. You can claim a business bad debt using either the specific charge-off method or the nonaccrual-experience method. 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. A debt becomes worthless when the surrounding facts and circumstances indicate there is no reasonable expectation of payment. To show that a debt is worthless, you must establish that you have taken reasonable steps to collect the debt. 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. You do not have to wait until a debt is due to determine whether it is worthless. I hope this Answer is helpful and that you will give it a positive rating. If you have any follow up questions please send back a Reply. You should consult a local attorney to verify that this information is accurate for your state. Thank you for using Pearl.com- Just Answer. We appreciate your business.
Irwin Law, Attorney
Category: Business Law
Satisfied Customers: 7276
Experience: 30+ yrs. representing small business, real estate, probate
Irwin Law and other Business Law Specialists are ready to help you
Customer: replied 4 years ago.
Thank you for your reply. I need some clarification.
The debt in my case is a non business and to a non relative. A collection case has been filed in court but case has been archived by judge because borrower could not be found to receive the summons. It has been in this status for the last 6 months.
CAN I NOW WRITE OFF THIS LOAN AS BAD DEBT IN MY STATEMENT OF ASSETS AND LIABILITIES ?
CAN I CLAIM THE FULL AMOUNT AS DEDUCTION IN MY 2012 tax return?
Appreciate your kind attention to my inquiry.

Yes. Since you tried collection unsuccessfully in 2012, you can write it off in 2012. You don't have to wait for a final ruling from the court because if you haven't been able to obtain services of process, you now that the suit will be ineffective.

I hope this Answer is helpful and that you will give it a positive rating. If you have any follow up questions please send back a Reply. You should consult a local attorney to verify that this information is accurate for your state. Thank you for using Pearl.com- Just Answer. We appreciate your business.

Irwin Law, Attorney
Category: Business Law
Satisfied Customers: 7276
Experience: 30+ yrs. representing small business, real estate, probate
Irwin Law and other Business Law Specialists are ready to help you

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