For noncorporate taxpayers, however, this allowance is qualified; losses attributable to nonbusiness bad debts are treated as resulting from the sale or exchange of capital assets held for not more than one year (i.
On the other hand, if he advances the funds to Beans Real Estate, which in turn advances the funds to the partnership, absent unusual circumstances (that do not appear to be present in this case), any bad debt loss realized by Norman would be a nonbusiness bad debt, giving rise to a capital loss.
The Tax Court held that the doctor was an investor, not a professional money lender; thus, the losses were nonbusiness bad debts
and short-term capital losses.
Business bad debts that are completely or partially worthless are deductible as ordinary losses, while nonbusiness bad debts
are short-term capital losses only when entirely worthless.
166(d) allows short-term capital loss treatment for the nonbusiness bad debts
of noncorporate taxpayers.
Ralph has incurred capital losses from nonbusiness bad debts
and would like to use these capital losses to offset capital gains from the sale of some of his properties.
Business bad debts result in ordinary losses; nonbusiness bad debts
result in short-term capital losses.
Two conditions must be met to deduct nonbusiness bad debts
This is typically preferable to the tax treatment of nonbusiness bad debts
, which are deductible as a short-term capital loss in the year the debt becomes totally worthless.
Individual taxpayers may deduct two different types of bad debts: business bad debts, which are deductible as ordinary losses if completely or partially worthless, and nonbusiness bad debts
, which are short-term capital losses taken only when entirely worthless.
166(d) provides that noncorporate taxpayers can claim short-term capital losses for nonbusiness bad debts
For individual taxpayers, bad debts are either (1) business bad debts, deductible as ordinary losses, or (2) nonbusiness bad debts
, deductible as capital losses.