Question

Calculator Print Item Problem 6-12 (Algorithmic) (LO. 1) Monty loaned his friend Ned $28,000 three years ago. Ned signed a note and made payments on the loan. Last year, when the remaining balance was $21,000, Ned filed for bankruptcy and notified Monty that he would be unable to pay the balance on the loan. Monty treated the $21,000 as a nonbusiness bad debt. Last year before considering the tax implications of the nonbusiness bad debt, Monty had capital gains of $8,400 and taxable income of $49,000. During the current year, Ned paid Monty $18,900 in satisfaction of the debt. Determine Monty's tax treatment for the $18,900 received in the current year. The nonbusiness bad debt of $21,000 would have been reported as al and would be included in Monty's gross income. short-term capital loss long-term capital loss ordinary loss

Answer 1

Ans: Short Term Capital Loss; $ 11,400

Explanation:

1) Non business debt is always treated as short term capital loss.

2) Non business debt is is unrelated to the taxpayer's trade or business either when it is created or become worthless.

3)  If a debt has been written off in one year and deduction was taken in that year,  later when collection of debt occurs taxpayer will have income and will be added to gross income.

4) The maximum amount of a net short-term capital loss that an individual can deduct against ordinary income is $3000 per year.

5) Therefore, $11400 would be included in Monty's gross income.

( $8400 gain + $ 3000 limit)