David Posted April 7, 2012 Report Share Posted April 7, 2012 TP has an outstanding loan to his employer with documentation. Employer is claiming bankruptcy and told the TP that they will not be able to pay the loan. The company's CPA sent the TP information stating that he would be able to fully deduct the bad debt since employee loans to employers are considered business debts. From my research it is correct that this employee loan bad debt is considered a business bad debt. However, none of the research sources say where a business bad debt is reported on Form 1040. Is it reported as a negative number on line 21, other income? Since the bad debt is fully deductible it doesn't seem right to report it on Sch A since the only way a TP would be able to take the bad debt deduction is if he is able to take itemized deductions. Thanks. Quote Link to comment Share on other sites More sharing options...
Terry D EA Posted April 7, 2012 Report Share Posted April 7, 2012 http://www.irs.gov/publications/p529/ar02.html Read the above publication as it clearly addresses your issue. While it seems unfair, employee bad business debts are deductible as a miscelleanous deduction subject to the 2% floor. The bad debt is deducted as an unreimbursed employee expense using form 2106. Quote Link to comment Share on other sites More sharing options...
Randall Posted April 7, 2012 Report Share Posted April 7, 2012 And watch out for AMT. Ouch. Quote Link to comment Share on other sites More sharing options...
OldJack Posted April 7, 2012 Report Share Posted April 7, 2012 http://www.irs.gov/p.../p529/ar02.html Read the above publication as it clearly addresses your issue. While it seems unfair, employee bad business debts are deductible as a miscelleanous deduction subject to the 2% floor. The bad debt is deducted as an unreimbursed employee expense using form 2106. Well, while employee business debt is on Sch-A, that is true, this may depend upon the facts. If this loan was not for keeping his employment it may have been a simple investment which would not be on Sch-A. If it is a business bad debt it could be deducted on form 4797 part 2 or if it is a non-business bad debt it could be deducted on 1040 Sch-D. You have to establish the facts. Quote Link to comment Share on other sites More sharing options...
cred65 Posted April 7, 2012 Report Share Posted April 7, 2012 Business Bad Debt. See attached US Tax Court case. Business versus nonbusiness bad debt: Dagres, 136 T.C. No. 12 Filed 3/28/2011 “Section 166 distinguishes between business bad debts and nonbusiness bad debts. Sec. 166(d); sec. 1.166-5(, Income Tax Regs. Business bad debts may be deducted against ordinary income and are deductible whether such debts become wholly or partially worthless during the year. Nonbusiness bad debts may be deducted only as short-term capital losses and only if the debts become wholly worthless in the year claimed. Sec. 166(d). A bad debt is characterized as business rather than nonbusiness if the debt bears a proximate relationship to the taxpayer's trade or business. Sec. 1.166-5(, Income Tax Regs. In determining whether such relationship exists, the proper measure is the taxpayer's dominant motivation; a significant motivation is not sufficient. The business nexus required for deducting a bad debt under section 166(a) exists where the dominant motive in incurring the debt was protecting or enhancing the taxpayer’s trade or business.” Dominant motivation is the key in determining the classification of the bad debt. If loans to the business can be documented as to keeping the business alive, this factor should serve to justify a business bad debt. “Protecting and enhancing the business” is cited in the court cases as substantial reasons. Quote Link to comment Share on other sites More sharing options...
jainen Posted April 7, 2012 Report Share Posted April 7, 2012 >>Dagres, 136 T.C. No. 12<< This is not a very similar case. Dagres managed venture capital funds through his LLC, and loaned the money not to his own company but to outside person generating leads. His dominant motivation was generating those leads, a matter of business operations rather than capitalization. There are many other cases of employee loans, and they are NOT all decided in favor of business treatment. I have no particular reason to doubt David's original post, but I'm always skeptical when someone uses the general term "documentation" without explaining what that actually includes. Quote Link to comment Share on other sites More sharing options...
jetaxes Posted April 7, 2012 Report Share Posted April 7, 2012 Many years ago I had a Few clients that had non-business bad loans and I used a form called "Statement in Support of Non-Business Bad Debt." and right below it said The following information pertains to the non-business bad debt claimed on schedule "D" as a short term capital loss. (Reference IRC Section 166.) I always used this when there was a bad debt involved. Never had any feedback from IRS. I still have the form but havent needed in quite a while. Thats my 2 cents worth. Quote Link to comment Share on other sites More sharing options...
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