Originally Posted by Robb51
I understand that I can deduct up to $3,000.00 from my gross income for this bad loan. But, if the loss is considerably more than that, is there a way to distribute the loss over multiple tax years?
yes. If you loan money to someone in a true debtor-creditor relationship that is unrelated to your trade or business, the loan is a nonbusiness debt. They are subject to the capital loss limitation, which means you cannot deduct more than $3K per year. Anything in excess of that amount is carried forward to future years until it is used up.According to IRS Publication 550, for each bad debt consumers need to attach a statement to the return that includes:A description of the debt, including the amount, and the date it became due;The name of the debtor, and any business or family relationship between you and the debtor;The efforts you made to collect the debt; and Why you decided the debt was worthless. For example, you could show that the borrower has declared bankruptcy, or that legal action to collect would probably not result in payment of any part of the debt. A partially worthless debt is not deductible.In general, as said abvoeyou can take the deduction by claiming a STCL on Sch D of your Form 1040 tax return; for tax purposes, you have a bad debt when you're owed money and you can't collect it..All other bad debts, except biz bad debts, are nonbusiness bad debts, like the money you lend to your friend. In certain situations, you can take a tax deduction when the debt isn't repaid. your bad is deductible only if it qualifies as a nonbusiness bad debt. That's because you're not in the money-lending business, and the loan isn't connected to your business. To deduct your nonbusiness bad debt, you have to show that:The debt is bona fide there has to be a debtor-creditor relationship, and (there has to be a valid and enforceable obligation for repayment);You have a basis in the debt ;The debt became totally worthless in the year you claim the deduction. You can take the deduction only in the year in which the debt becomes totally worthless. For example, if your buddy didn't repay a loan in 2013 as promised and it becomes worthless in that year because he filed bankruptcy, then you must claim the deduction on your 2013 return.even if you didn't take a deduction in the year it became worthless, you may be able to file a claim for a credit or refund due to the bad debt. You have to file an amended return for the year the debt became worthless. You have to file the amendment within seven years from the date your original return for that year had to be filed, or 2 years from the date you paid the tax, whichever is later.