Question

In 2015, Gerald loaned Main Street Bakery $55,000. In 2016, he learned that he would probably receive only $6,400 of the loan. In 2017, Gerald received $3,000 in final settlement of the loan. Calculate Gerald’s possible deductions with respect to the loan for 2015, 2016, and 2017.

2015:

2016:

2017:

Answer 1

Answer

in 2015 and 2016 No deduction

In 2017 $52000 deduction allowed calculated as $55000-$3000 = $52000

Logic explained below

Loan given By Gerald is a non business debt as per Section 1.166-5(b) so loss from bad debt will be treated as per Section 1.166-5(a)(2)

Treatment

IN 2015 and 2016 no deduction allowed as non business debt has not become wholly worthless because it seems that there will be some collections in future as as per Section 1.166-5(a)(2) non business debt which has become wholly bad is only allowed as deduction in the year it becomes bad

In 2017 Deduction of $52000 will be allowed as $52000 has become wholly worthless it will be allowed as short term capital loss within Section 1.166-5(a)(2)

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