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Merlo, Accountant
Category: Tax
Satisfied Customers: 9783
Experience:  25+ years tax consulting. Specializing in returns for US citizens living abroad
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My name is Mark Ott - i have a question about claiming a loss.

Resolved Question:

My name isXXXXX - i have a question about claiming a loss. In Feb of 2008, I made an investment in a local company of $25,000. Without seeing any profits, the owner filed for bankruptcy in July of 2009. Is there anyway of claiming the loss on my 2009 return? The $25000 was paid as an investment to the company and the money came from a HELOC that my wife and I set up.
Submitted: 7 years ago.
Category: Tax
Expert:  Merlo replied 7 years ago.

Hello JA Guest,


If someone owes you money that you cannot collect, you have a bad debt.


A personal bad debt is deducted as a short term capital loss and is subject to the capital loss limitations of no more than $3,000 in total capital losses in any one tax year. If your losses exceed the amount you can deduct in the current year, you can carry forward the remaining loss to be deducted in future tax years, until you have been able to deduct the entire amount.


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


A debt must be genuine for you to deduct a loss. A debt is genuine if it arises from a debtor-creditor relationship based on a valid and enforceable obligation to repay a fixed or determinable sum of money.


For a bad debt, you must show that there was an intention at the time of the transaction to make a loan and not a gift. If you lend money to a relative or friend with the understanding that it may not be repaid, it is considered a gift and not a loan. You cannot take a bad debt deduction for a gift. There cannot be a bad debt unless there is a true creditor-debtor relationship between you and the person or organization that owes you the money.


You can take a bad debt 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. A debt becomes worthless when there is no longer any chance that the amount owed will be paid. It is not necessary to go to court if you can show that a judgment from the court would be uncollectible. You must only show that you have taken reasonable steps to collect the debt. Bankruptcy of your debtor is considered good evidence of the worthlessness of at least a part of an unsecured debt.


Please refer to the following IRS publication under the section titled "Capital Gains and Losses - Nonbusiness Bad Debts". On page 55 under the section titled "How To Report Bad Debts" you will find specific instructions on how to report a bad debt on Schedule D.


If this was helpful please press the Accept button. Positive feedback is also appreciated.


Thank you.



Merlo and 5 other Tax Specialists are ready to help you
Customer: replied 7 years ago.
So, would the $25,000 investment into the company that went bankrupt classify as a bad debt? The investment was to become part owner of the company and relying on the company to produce profits in order to repay the original investment. I guess what I need to know is if an investment such as this quailifies for a bad debt, non-business bad debt or is it a capital loss?
Expert:  Merlo replied 7 years ago.

Hello again JA Guest,


Since your investment was to include ownership in the company, let me put your question back on the open list in our forum to see if another tax expert can help address your question.


Customer: replied 7 years ago.


Problem is, the original intention was for 25% ownership to be signed over - that never occurred prior to the owner filing for bankruptcy - after reading through the IRS info, it appears that i may be able to claim it as a short-term capital loss. Can you please confirm this

Expert:  Merlo replied 7 years ago.

Hello again JA Guest,


I am not 100% certain of how it would be treated in this situation, which is why I have placed your question back on the open list to see if another expert here has more specific experience in this type of situation.


You will receive an email notification as soon as someone posts a response.


Thanks for your patience, and hopefully we can get you an answer soon.



Customer: replied 7 years ago.


I have not gotten a response yet and i beilieve it might be because i clicked accept before we were done with the Q & A period. can you please post again or do i need to re-ask the question?



Expert:  Merlo replied 7 years ago.

Hello again Mark,


Even though you did hit the accept button, your question was replaced on the open list, so I cannot say for certain why you have not yet received another response.


It would not hurt to post a brand new question. That will assure that your question goes directly to the top of the list and normally should bring a quicker response.


Thanks Mark