John borrowed $25,000 in 2012 from his Dad to start a business. John signed a no

Question

John borrowed $25,000 in 2012 from his Dad to start a business. John signed a note agreeing to pay the loan plus the appropriate AFR rate of 7%. In 2015, John filed bankruptcy. He told his Dad that he would not be able to repay the $25,000 or the accrued interest of $1,750 due on the note. If his father is an accrual basis taxpayer and only income is salary and interest income, what is the proper treatment for the nonpayment of the note? a. No deduction. b. $3,000 deduction. c. $20,000 deduction. d. $26,750 deduction. e. $1,750.

Explanation / Answer

Mr. John is eligible for deduction of $ 26750 as deduction for non payment (25000+1750).

Answer in d. $ 26750

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