the gain and describe how it will be treated on the tax return. Pu 16. Bad Debts

Question

the gain and describe how it will be treated on the tax return. Pu 16. Bad Debts. (Obj. 2) Rita loaned her brother, Richard, $7,500 on February 14, 2015. The loan represents a bona fide loan. Richard filed for bankruptcy in 2016, and Rita learned thar she could expect to receive only $.70 on the dollar on the personal loan that she had made to him. On May 17, 2017, Rita received a final settlement of $4,000 a. How much loss can Rita deduct in 2016? b. How much loss can Rita deduct in 20173 How will this loss be treated on Rita's tax c. 1 and Capital Gains and Losses. (Obj. 3) Use the follow- on to an

Explanation / Answer

a) The loan given by Rita to her brother of $7,500 is considered as a loan to relative. In 2016 she has expected a recovery of $0.70 on each dollar of personal loan. Thus her expected recovery amount is $5,250 ($7,500*0.70). Thus the loss she will recognised in 2016 on loan to her brother is $2,250 ($7,500-$5,250).

But this loss will not be deuctible in her income tax return as bad debt because it will be cosidered as a non business bad debt. A non business bad debt must be totally worthless to be deductible. A person can not deduct a partially worthless non business bad debt.

b.) In her accounts of 2017 she will recognise an additional bad debt loss of $1,250 ($5,250-$4,000) on final settlement of loan. But in her income tax return the whole of non business bad debt of $3,500 ($7,500-$4,000) will be deductible in 2017.

c.) This non business bad debt will be reported as a short term capital loss on Form 8949, Sales and other Dispositions of capital assets, Part 1, line 1 in her income tax return.

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