During 2016, Becky loans her brother Ken $5,000, which he intends to use to esta

Question

During 2016, Becky loans her brother Ken $5,000, which he intends to use to establish a small business. Because Ken has no other assets and needs cash to establish the business, the agreement provides that Ken will repay the debt if (and when) sufficient funds are generated from the business. Becky and Ken do not establish an interest rate. The business is unsuccessful, and Ken is forced to file for bankruptcy in 2017. By the end of 2017, it is estimated that the creditors wil receive only 20% of the amount owed. In 2018 the bankruptcy proceedings are closed, and the creditors receive 10% of the amount due on the debt. What is Becky's bad debt deduction for 2017? For 2018? (Enter a "0* if no bad debt deduction can be taken.) Becky's bad debt deduction wilbe for 2017 and for 2018

Explanation / Answer

Non business Bad debt is deductible in the year in which when facts and circumstances indicates that there is no reasonable expectation that debt will not be repaid. (Reasonable expectaion can be order by court)

In 2017 ,Becky is not entitle to deduct any of non business debt as the court order is still not passed.Amount of deduction : $ 0

In 2018 ,If 10% of amount is recoverable then it means 90% of debt is a bad debt.Amount of deduction : 5000*.90= $ 4500

**Interest amount accrued is ignored since no information is provided for same.

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