I have a client who initially owned an S-corp 100%. At some point his spouse became an owner and it was mid-year during a tax year. In the current year they are abandoning all their assets (leasehold improvement) as the property it was renting is no longer available. The only thing on the balance sheet now are loan from shareholder, common stock, additional paid in capital and negative retained earnings. So this year we were going to write off the loan from shareholder and the company would have a gain on forgiveness of debt. Then personally, the loan can be taken as a deduction on their 1040s - from what I have found and read - it is considered a non-business bad debt and is limited to the $3000 loss per year. So I'm wondering if there is anything else we can do. We can leave the loan on the books, but the client doubts it will ever be paid back. The CS/APIC/RE would wipe out to zero.

1. Can someone give me the specific IRS section that states a loan from shareholder is considered non-business bad debt and limited?
2. Anyone have any idea of how to get a larger loss on their 1040?

Thanks!