Question

Last year, Jane identified $62,200 as a nonbusiness bad debt. In that tax year before considering the tax implications of the nonbusiness bad debt, Jane had $124,400 of taxable income, of which $6,220 consisted of short-term capital gains. This year, Jane collected $12,440 of the amount she had previously identified as a bad debt. Hint: Section 111(c) applies in this situation. Jane treats the $62,200 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

If the account was written off during a previous taxable year, income created for the current year (Jane’s acceptance of the $12,440) is subject to the tax benefit rule. She must include this amount in her gross income.

The non business bad debt of $62200 would have been reported as a short-term capital loss , and $9220 would be included in Jane's gross income. Jane must include up to $12440 in gross income but only to the extent of a tax benefit in a prior year. Because the debt is a non business bad debt, the $62200 would have been reported as a short-term capital loss. Last year, Jane had $6220 capital gains and taxable income of $124400. Therefore, $9220 ($6220 offset gains + $3,000 overall limit) of $62200 is produced a tax benefit. Hence, only $9220 would be included in Jane's gross income this year.

Answer: Jane treats th $62200 nonbusiness bad debt as of which $52980 is carried over to the current year. Jane would have to include $9220 of the collection in gross income in the current year, resulting in a remaining carry over of $43760