Where do I report a loan loss?

[DonaldM · Accepted solution]

Personal bad debts are deductible as a short term capital loss on Form 8949.  They are difficult to support as bad debts instead of non-deductible gifts, however, when they are made to friends and family member.  The IRS closely scrutinizes bad debts between friends and family members to insure they are not disguised gifts.

From http://www.irs.gov/taxtopics/tc453.html :  For a bad debt, you must show that there was an intention at the time of the transaction to make a loan and not a gift. If you lend money to a relative or friend with the understanding that it may not be repaid, it is considered a gift and not a loan.
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The instructions in IRS' Publication 17 provide additional requirements for reporting a bad debt.  They include:

"How to report bad debts.    Deduct nonbusiness bad debts as short-term capital losses on Form 8949.

  On Form 8949, line 1, enter the name of the debtor and “bad debt statement attached” in column (a). Enter your basis in the bad debt in column (f) and enter zero in column (e). Use a separate line for each bad debt. "

Also -

"For each bad debt, attach a statement to your return that contains:

• A description of the debt, including the amount, and the date it became due,
• The name of the debtor, and any business or family relationship between you and the debtor,
• The efforts you made to collect the debt, and
• Why you decided the debt was worthless. For example, you could show that the borrower has declared bankruptcy, or that legal action to collect would probably not result in payment of any part of the debt."

Turbotax asks for this information.

Turbotax could make entering a bad debt easier but, for the desktop version, the sequence would be as listed below.  (I assume it's similar for the on-line version but I don't use it.)
To deduct a bad debt, go to the wages and income tab, then choose "I'll choose what I want to work on" (the "deduction" is under the income category as it is part of capital gains or losses)

• From the next page under the Investment Income heading select Stocks, Mutual Funds, Bonds, Other
• In response to "Did you Sell Any Investments in 2013" select yes.
• On the next page, under Let Us Enter Your Investment Sale Info, check "I'll type it in myself".
• On the next page for "Select Your Financial Institution" select "No Financial Institution"
• On the next page, for the first item, check "Add More Details"  for the first free item,
• On the next page select "Uncollectible Debt"
• The next page will show the data you need to enter for the debt.

[LindaB1993]

A personal bad debt that is considered uncollectible is entered in TurboTax under::

1. The Wage and Income Tab
2. Then Select "Investments"
3. Then Stocks, Bonds, other, etc 

For detailed instructions, please view the following link:

How to report a Bad Debt

[Lattitude1]

Do you report on Sch D (form 8949) for both a non-business as well as a business non-collectable bad debt?

[ReneeM7122]

Business and personal loan losses are reported differently.

• Report a nonbusiness bad debt as a short-term capital loss on Form 8949, Sales and Other Dispositions of Capital Assets.
• Deduct a business bad debt on i Schedule C (Form 1040), Profit or Loss From Business (Sole Proprietorship) or on your applicable business income tax return.

The following is from IRS Topic 453 - Bad Debt Deductions:

If someone owes you money that you can't collect, you may have a bad debt. For a discussion of what constitutes a valid debt, refer to Publication 550, Investment Income and Expenses and Publication 535, Business Expenses. Generally, to deduct a bad debt, you must have previously included the amount in your income or loaned out your cash. If you're a cash method taxpayer (most individuals are), you generally can't take a bad debt deduction for unpaid salaries, wages, rents, fees, interests, dividends, and similar items. For a bad debt, you must show that at the time of the transaction you intended to make a loan and not a gift. If you lend money to a relative or friend with the understanding the relative or friend may not repay it, you must consider it as a gift and not as a loan, and you may not deduct it as a bad debt.

There are two kinds of bad debts – business and nonbusiness.

Business Bad Debts - Generally, a business bad debt is a loss from the worthlessness of a debt that was either created or acquired in a trade or business or closely related to your trade or business when it became partly to totally worthless. A debt is closely related to your trade or business if your primary motive for incurring the debt is business related. You can deduct it on Schedule C (Form 1040), Profit or Loss From Business (Sole Proprietorship) or on your applicable business income tax return.

The following are examples of business bad debts (if previously included in income):

• Loans to clients, suppliers, distributors, and employees
• Credit sales to customers, or
• Business loan guarantees

A business deducts its bad debts, in full or in part, from gross income when figuring its taxable income. For more information on methods of claiming business bad debts, refer to Publication 535, Business Expenses.

Nonbusiness Bad Debts - All other bad debts are nonbusiness. Nonbusiness bad debts must be totally worthless to be deductible. You can't deduct a partially worthless nonbusiness bad debt.

A debt becomes worthless when the surrounding facts and circumstances indicate there's no reasonable expectation that the debt will be repaid. To show that a debt is worthless, you must establish that you've taken reasonable steps to collect the debt. It's not necessary to go to court if you can show that a judgment from the court would be uncollectible. You may take the deduction only in the year the debt becomes worthless. You don't have to wait until a debt is due to determine that it's worthless.

Report a nonbusiness bad debt as a short-term capital loss on Form 8949, Sales and Other Dispositions of Capital Assets, Part 1, line 1. Enter the name of the debtor and "bad debt statement attached" in column (a). Enter your basis in the bad debt in column (e) and enter zero in column (d). Use a separate line for each bad debt. It's subject to the capital loss limitations. A nonbusiness bad debt deduction requires a separate detailed statement attached to your return. The statement must contain: a description of the debt, including the amount and the date it became due; the name of the debtor, and any business or family relationship between you and the debtor; the efforts you made to collect the debt; and why you decided the debt was worthless.

@Lattitude1

[jc1128]

This was a loan to a relative for business startup with all intentions to repay,   but that was over 20 years ago and since then he passed away, can i file a loss on taxes with no documents present as with moving they were  lost in

the move?

[JohnW152]

With no documentation, you can’t really claim a non-business bad debt on your return.  

Among other things, you must be able to show the debt was legally enforceable, and that you exhausted all reasonable means of recovering the debt.  

You’d need to show a documented effort on your part to collect the money – that is, you’d need to be able to reflect that you’ve sent letters or invoices to the relative, or made phone calls trying to collect the money.

Just based on what you say, it doesn’t sound like you have any of this.

Please see the TurboTax Help article How to Report Non-Business Bad Debt on a Tax Return for more information.

@jc1128