Question

During the past tax year, Jane identified $50,000 as a nonbusiness bad debt. In that tax year, Jane had $100,000 of taxable income, of which $5,000 consisted of short-term capital gains. During the current tax year, Jane collected $10,000 of the amount she had previously identified as a bad debt.

Jane treats the $50,000 nonbusiness bad debt as ______ of which $_____ is carried over to the current year. Jane would have to include $______ of the collection in gross income in the current year, resulting in a remaining carryover of $______.

Answer 1

You can take the deduction only in the year in which the debt becomes totally worthless.
Unlike business bad debts, nonbusiness bad debts are classified as short-term capital losses for tax purposes.
As such, they are subject to the limitations on taking short-term capital losses.
You can deduct such a loss against any short or long-term capital gains you have for the year from the sale of capital assets (such as real estate and stocks).
Any remaining amount of your loss is deductible only up to $3,000 per year against your other ordinary income.
Nondeductible losses may be carried over to be deducted in future years.

So, Here if the $50,000 needs to be treated as short term capital loss of which $5,000 can be set off against the short term capita gains earned in last tax year.
of remaining $45,000 Short term capital loss only $3,000 is allowable and balance is non deductible which may be carried over to be deducted in future years that is $42,000.

If an account receivable is written off and is recovered in subsequent tax years, income is created subject to tax benefit rule.