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Yes - that is deductible.
If someone owes you money that you cannot collect, you may have a bad debt.
Nonbusiness bad debts must be totally worthless to be deductible.
So - you need to be clear and be able to support following:
- you made adequate attempts to collect the debt
- the debt is worthless
- when the debt became worthless.
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 that it is worthless.
Report a nonbusiness bad debt as a short-term capital loss on Form 8949 , Sales and Other Dispositions of Capital Assets, Part 1, line 1. Enter the name of the debtor and "bad debt statement attached" in column (a). Enter your basis in the bad debt in column (e) and enter zero in column (d). Use a separate line for each bad debt. It is subject to the capital loss limitations. A nonbusiness bad debt deduction requires a separate detailed statement attached to your return.
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