Company A (LLC
taxed as a partnership
) brings in net revenue of $1,000 from an asset
sale.Company A purchases debt (convertible notes) issued by Company B (a private company) from several noteholders of Company B. Company A's cost basis for all the notes is $1,000.In the same tax
year, Company B becomes insolvent and the debt/notes become uncollectible, so Company A writes off the notes as bad debt (or worthless securities -- whichever is applicable in this case) and takes the deduction
.Does Company A end up with a net negative tax obligation, or a zeroed-out tax obligation? In other words, because of the $1,000 loss due to the bad debt, do Company A partners get to take a total $1,000 NOL to apply against their tax obligation, or is it zeroed out because of Company A's $1,000 in income
?Further, is the bad debt / worthless security deduction limited to the actual cost paid by Company A for the notes, or can the full amount of the notes themselves be deducted? For example, if the principal on a note is $5,000, but Company A only paid $1,000 for that note, could Company A write down the full $5,000 "asset value" of the note, or just the $1,000 it spent to purchase the note?Thanks so much!