Sure ... lets take it one step at a time ....
First, what'll you'll want to do is document this as a business writess
Writeoff, essentially, that there coulld have been a profit made
(I understand that it was somehow going to be treated as a loan, but someone sttod to gain here right?)
Essentially, you'll want to treat this (especially since no else ever really became involved)
OK, as your own business venture, (as a sole proprietor) on schedule C as an attahment to your tax returnm
hang with me... may have to provide some rather lengthy descriptions
Question: Could you have profited here?
IRS won't allow losses for a venture that was never intended to MAKE a profit
completely different BUT still workable
let me get the IRS documentation on bad debt writeoffs
Let’s start with the basics:
1. In order to write off a bad debt, you must have proof that the transaction was indeed a debt and not a gift.
2. There are two types of bad debts: business (from operating your business) and non business.
YEs, bt there's a SMALL problem there .... ANYTIME you loan money (technically) there is supposed to be interest charged and paid tax on... (doesn't happen a lot, but IRS HAS when they see it re-characterized them as a below market loan) let's put that aside for minute
back to number 3
3. The debt must arise from cash out of your pocket, or in the case of business, bad debts must have been included in income.
This is probably best classed as NON-bisiness because you don't loan money as a business (but that;s ok)
4. You must have a basis in the debt. In other words, the debt must arise from funds you parted with, not from something you expected to receive.
5. The debt must be deemed completely worthless and reasonable steps must have been taken to collect on the debt.
SO as long as the assumption is that there WOULD have been interest, but this was just a COMPLETE LOSS, you're fine
With me so far?
OK, as far as the procedure goes? There's but a little deferred gratification .....
Non-business bad debts are reported as short-term capital losses on Schedule D of your tax return. They are subject to the capital loss limitation, which means you cannot deduct more than $3,000 per year. Anything in excess of that amount is carried forward to future years until it is used up.
SO you can re-capture it as a deduction from your taxable income but it'll take a cuple of years
Now, as far as what's needed on your tax return?
yep, 3000, 3000 and 1500
According to IRS Publication 550, for each bad debt consumers need to attach a statement to the return that includes:
*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.
Just good written documentation of your collection efforts... you DON'T have to take them to court... but you need a good paper trail of a few collection letters and phone calls .. essentially ? You want to truly try to collect, and once you believe you'll never seet it write it off
I just found this from a FoxBusiness article...
To determine if a debt can be written off, consumers should pretend they are sitting across from an auditor defending a deduction on the tax return. Proper defense involves having proper documentation. The first thing to do when engaging in any business transaction is to create a paper trail. If you are lending a friend $5,000 to open a business, have your friend sign a promissory note and pay your friend with a check, inscribing “business loan” on the memo line-- this is the first step to defending a future bad debt on your tax return.
If you have already made the bad loan, there are other ways to prove the transaction was a debt and not a gift. Hopefully, you lent the money via check or money order and have a cancelled check or receipt to prove the loan amount. A letter from the recipient apologizing for the inability to repay would help as would a successful lawsuit filed against the person with no ability to collect.
Still with me?
BotXXXXX XXXXXne her, you have a very legitimate deduction of a non-business bad debt.
This last paragraph is really the botXXXXX XXXXXne here: Again ...