Question

n 2016, Gerald loaned Main Street Bakery $55,000. In 2017, he learned that he would probably receive only $6,400 of the loan. In 2018, Gerald received $3,000 in final settlement of the loan. Calculate Gerald’s possible deductions with respect to the loan for 2016, 2017, and 2018.

Answer 1

Possible deduction for Gerald in 2016 and 2017 :There will be no deduction.

In 2018, deduction that will be allowed = $52000($55,000-$3,000)

The deduction will be treated as short term capital loss.

Explanation:

Possible deductions are only allowed on non-business debt , those which have become wholly bad in the year it becomes bad.

In this case, the loan that was given By Gerald is a non business debt. He learnt that he would probably receive only $6,400 in 2017. He received final settlement of $3,000 in 2018. And this is the reason why no deduction will be allowed in 2016 and 2017 as the debt has not become entirely worthless because it seems that there may be some collections in the future.

In 2018, he received final settlement of $3,000 and rendering the remaining a bad debt

Possible deduction = Total loan given - Amount received in final settlement

Possible Deduction = $55,000 - $3,000

= $52000

So deduction of $52000 will be allowed as it has become wholly worthless.