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 will 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?

Explanation / Answer

Amount given by Becky to her brother Ken = $5,000

The creditors receive 10% of the amount due on the debt therefore amount received by Becky = 10% *$5,000 = $500

And remaining amount of $5,000 - $500 = $4,500 loss is to be treated as a short-term capital loss.

This short-term capital loss must exceed any short-term capital gains first and then that difference is limited to ($5,000 *60%= $3,000) $3,000 as a deduction for the year 2017.

She may deduct only $3,000 as a short-term capital loss

For 2018, if any excess amounts of $3,000 exist, they can be carried forward to next year.

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