Question

Carrie loaned her friend 4500 to buy a used car. She had her friend sign a note with repayment terms and set a reasonable interest rate on the note because the 4500 was most of her saving. Her friend left town without a forwarding address and nobody has heard from her since last year. How should Carrie treat the the bad loan for tax purposes?

Answer 1

Ans: Carrie should treat the bad loan for tax purposes as follows:-

This is a non-business bad debt

Assuming this is Carrie’s only capital gain or loss; she may claim a short-term capital loss in the current year and carry forward any remaining amount.

Note: 1.bad debts fall into one of two categories, business bad debts or non-business bad debts.

                2. Business bad debt is ordinary deductions

                3. Non-business bad debt is short-term capital losses.

4. Only $3000 of net capital losses may be deducted against ordinary income in any one tax year.