Tax Quiz: Bad Debt Deductions
September 19, 2014 by Stephanie Potash
b. Yes — a $1,000 theft loss deduction since your money was stolen.
c. Yes — a business expense deduction because you’re in the loan business.
d. Yes — a short-term capital loss on Schedule D.
The answer is d
Although the IRS is suspicious of loans between friends and family members, you are allowed to take a bad debt deduction as a short-term capital loss for a legitimate transaction. You must be able to prove that the loan was valid and that you made serious attempts to collect the money. Ask your tax adviser for more information on how to set up the deal.