The Tax Court held that a taxpayer properly took a deduction for a business bad debt
. According to the court, the taxpayer was engaged in the business of lending money and correctly wrote off a bona fide loan related to that business that had become worthless during the year it was deducted.
Careful tax planning that maximizes the business bad debt
deduction can help minimize the taxpayer's overall economic loss.
On the other hand, if the dominant motive behind the loan or loan guarantee was to protect the shareholder's status as an employee, the loss is a business bad debt
, which is fully deductible when the debt becomes worthless.
An employee who loans money to his employer with the motive of retaining his job has a case for claiming a business bad debt
, but what if the employee is also an investor in the company?
Cooper did not report the loan as a bad debt in the amount of $750,000 on his original return but included it as a business bad debt
deduction in an amended return he filed in 2010.
On his personal income tax return, the taxpayer deducted the unpaid loans as a business bad debt
. The IRS denied the deduction.
1993), the Tenth Circuit allowed a share-holder/employee's business bad debt
deduction for amounts loaned to the corporation.
He deducted the loss as an ordinary loss under IRC section 165(a) and (c)(1) and as a business bad debt
under IRC section 166(a).
Whether a taxpayer can claim a business bad debt
or a nonbusiness bad debt is particularly important and can lead to a different result on the tax return.
If the note is issued by a noncorporate, nongovernmental entity, and it is a business bad debt
for a noncorporate holder, the loan is not a security under Sec.
A debt is classified as a business bad debt
if the taxpayer is engaged in a trade or business and, at the time the debt was acquired, created or became worthless, the debt was proximately related to that trade or business (there must be a dominant business reason--and not merely a significant one--for the loan).
The taxpayer claimed business bad debt
losses on his personal income tax returns (Forms 1040, U.S.