Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Transcribed Image Text:**Problem 3-20: Bad Debts (LO 3.10)**
Carrie loaned her friend $4,500 to buy a used car. She had her friend sign a note with repayment terms and set a reasonable interest rate on the note because the $4,500 was most of her savings. Her friend left town without a forwarding address, and nobody Carrie knows has heard from her in the last year.
**How should Carrie treat the bad loan for tax purposes?**
This is a **nonbusiness** bad debt. Assuming this is Carrie’s only capital gain or loss, she may claim a **short-term capital loss** in the current year and **carryforward** any remaining amount.
**Feedback:**
Bad debts fall into two categories, business bad debts and nonbusiness bad debts. Debts that arise from the taxpayer’s trade or business are classified as business bad debts, while all other debts are considered nonbusiness bad debts. The distinction between the two types is important, since business bad debts are ordinary deductions and nonbusiness bad debts are short-term capital losses.
Expert Solution
Step 1
The Loan provided to friends is clearly a “Non-Business” loan and so it is to be treated as Non-Business Bad debt as Short-Term Capital Loss.
Short-Term Capital Loss refers to the amount of money lost under a certain head which is allowed as a deduction up to the threshold limit and allowed to carry forward and write off in future years.
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