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Question Small business in Florida with two partners. One…

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Question: Small business in...
Question: Small business in Florida with two partners. One of the partners filed bankruptcy and the business filed bankruptcy. The other partner had loaned the company money. Is the loan from the other partner deductible as a bad debt to the partner with the loan?
Submitted: 8 years ago.Category: Tax
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Answered in 10 hours by:
6/10/2010
Tax Professional: BK-CPA, Certified Public Accountant (CPA) replied 8 years ago
BK-CPA
BK-CPA, Certified Public Accountant (CPA)
Category: Tax
Satisfied Customers: 933
Experience: Owner of a CPA firm
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The partner that remained in good standing will have losses that arise from the 'worthless' partnership interest as well as any bad debt from the partnership itself and/or the defaulting partner, yes. These may be ordinary losses, to some extent, and all of these losses are going to get deducted by the partner in good standing, in one way or another, yes.

 

Generally, partnership taxation can be a tricky thing when closing down the partnership and/or going through a situation like yours, where personal facts and circumstances become quite relevant, so definitely see a local tax professional too, ok?

 

Good luck!!

 

Thank you for your question and let me know if there is anything more I can do to clarify.

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Customer reply replied 8 years ago
Is there a tax code I can look up to verify this info?
Tax Professional: BK-CPA, Certified Public Accountant (CPA) replied 8 years ago

Sure:

 

http://www.law.cornell.edu/uscode/26/usc_sec_26_00000267----000-.html

 

§ 267. Losses, expenses, and interest with respect to transactions between related taxpayers

How Current is This?

(a) In general

(1) Deduction for losses disallowed No deduction shall be allowed in respect of any loss from the sale or exchange of property, directly or indirectly, between persons specified in any of the paragraphs of subsection (b). The preceding sentence shall not apply to any loss of the distributing corporation (or the distributee) in the case of a distribution in complete liquidation.

 

 

....

 

...

http://www.law.cornell.edu/uscode/html/uscode26/usc_sec_26_00001211----000-.html

 

 

§ 1211. Limitation on capital losses

How Current is This?

(a) Corporations In the case of a corporation, losses from sales or exchanges of capital assets shall be allowed only to the extent of gains from such sales or exchanges.

(b) Other taxpayers In the case of a taxpayer other than a corporation, losses from sales or exchanges of capital assets shall be allowed only to the extent of the gains from such sales or exchanges, plus (if such losses exceed such gains) the lower of-

(1) $3,000 ($1,500 in the case of a married individual filing a separate return), or

(2) the excess of such losses over such gains.

 

 

.....

 

...

 

 

http://www.law.cornell.edu/uscode/html/uscode26/usc_sec_26_00001212----000-.html

 

§ 1212. Capital loss carrybacks and carryovers

How Current is This?

(a) Corporations

(1) In general If a corporation has a net capital loss for any taxable year (hereinafter in this paragraph referred to as the "loss year"), the amount thereof shall be-

(A) a capital loss carryback to each of the 3 taxable years preceding the loss year, but only to the extent-

(i) such loss is not attributable to a foreign expropriation capital loss, and

(ii) the carryback of such loss does not increase or produce a net operating loss (as defined in section 172 (c)) for the taxable year to which it is being carried back;

 

 

 

......

...

 

http://www.law.cornell.edu/uscode/uscode26/usc_sec_26_00000165----000-.html

 

§ 165. Losses

How Current is This?

(a) General rule There shall be allowed as a deduction any loss sustained during the taxable year and not compensated for by insurance or otherwise.

 

(b) Amount of deduction For purposes of subsection (a), the basis for determining the amount of the deduction for any loss shall be the adjusted basis provided in section 1011 for determining the loss from the sale or other disposition of property.

 

(c) Limitation on losses of individuals In the case of an individual, the deduction under subsection (a) shall be limited to-

(1) losses incurred in a trade or business;

(2) losses incurred in any transaction entered into for profit, though not connected with a trade or business; and

(3) except as provided in subsection (h), losses of property not connected with a trade or business or a transaction entered into for profit, if such losses arise from fire, storm, shipwreck, or other casualty, or from theft.

 

....

 

 

...

 

http://www.law.cornell.edu/uscode/26/usc_sec_26_00000172----000-.html

 

 

§ 172. Net operating loss deduction

How Current is This?

(a) Deduction allowed There shall be allowed as a deduction for the taxable year an amount equal to the aggregate of

(1) the net operating loss carryovers to such year, plus

(2) the net operating loss carrybacks to such year. For purposes of this subtitle, the term "net operating loss deduction" means the deduction allowed by this subsection.

 

 

....

 

 

...

 

 

 

§ 108. Income from discharge of indebtedness

How Current is This?

(a) Exclusion from gross income

(1) In general Gross income does not include any amount which (but for this subsection) would be includible in gross income by reason of the discharge (in whole or in part) of indebtedness of the taxpayer if-

(A) the discharge occurs in a title 11 case,

(B) the discharge occurs when the taxpayer is insolvent,

(C) the indebtedness discharged is qualified farm indebtedness,

(D) in the case of a taxpayer other than a C corporation, the indebtedness discharged is qualified real property business indebtedness, or

.......

....

(....in case the partnership or bk partner gets a 1099-C, Cancellation of debt form, from the partner in good standing).

 

 

...

 

 

 

 

You may wish to check out Form 1099-C, cancellation of debt, if applicable.

 

http://www.irs.gov/pub/irs-pdf/f1099c.pdf

 

Instructions here:

 

http://www.irs.gov/pub/irs-pdf/i1099ac.pdf

 

 

 

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