So your friend was in a pinch and you thought they’d be good for it and they weren’t. It’s not all bad; you can lower your taxable income as a result.
Maybe you loaned money to a friend to help with a struggling situation. But now it’s beginning to look like you are never getting paid back.
Good ol’ Uncle Sam is there to help you take the sting out of never seeing that money again. As long as the debt has zero value, you may qualify for a deduction up to $3000.
This is different than an investment. This type of loan is considered a “non-business” bad debt. Non-business bad debt is considered a short-term capital loss. You don’t have to wait until the payment is due to consider it worthless; you just have to be able to prove that there is a qualifying reason that it won’t be repaid. Also, you must claim the deduction in the year that it becomes worthless.
If you need help understanding whether or not you qualify for the deduction, we’ll be happy to help. Everyone has a unique situation and it’s always best to get advice from a professional that understands where you are financially.
Image courtesy of lobstar28 on flickr; reproduced under Creative Commons 2.0