Can we deduct a loss as a creditor of a business that went bankrupt? If so, how?

[montanawetz]

We were engaged with a builder in 2015 who filed for bankruptcy before starting construction. We lost the down payment we posted to start construction. Creditor losses were declared uncollectible by the bankruptcy judge (limited assets).

[PatriciaV · Accepted solution]

Yes, you may be able to claim a non-business bad debt for the loss of your money.

The easiest way to find this section of TurboTax is to use the Search box at the top right side of the TurboTax header. Click on the magnifying glass, type in "bad debt, non-business", hit Enter, and click on  "jump to bad debt, non-business" to go directly to beginning of this topic.

• In response to "Did you Sell Any Investments in 20XX" select yes.
• On the next page for "Did you get a 1099-B..." say "No"
• On the next page select "Uncollectible Debt"
• The next page will show the data you need to enter for the debt.

For more information, see IRS Pub 17 Nonbusiness Bad Debts

[bclee]

PatriciaV's answer was for non-business bad debts but you asked about a business bad debt.  The answer is probably not, but you should follow IRS Publication 535, Chapter 10.  The version for TY 2018 is at https://www.irs.gov/publications/p535#en_US_2018_publink1000154202   Scroll down about 5/8ths of the page to 10. Business Bad Debts.   Note that

"You can claim a business bad debt deduction only if the amount owed to you was previously included in gross income. This applies to amounts owed to you from all sources of taxable income, including sales, services, rents, and interest. "

TT H&B 2018 search will find Jump to bad debt, self-employed income which will land you at Business Income and  Expenses - Here's the business info we have so far, but it offers no further help 😕

[IreneS]

If you loan money to a client, supplier, employee, or distributor for a business reason and you’re unable to collect the loan after attempting to do so, you have a business bad debt, which can be entered as an expense of the business.

To enter the bad debt in TurboTax, please follow these steps in your return:

TurboTax Self-Employed (Online)

1. Click on Income & Expenses and then click the Start/Revisit box in the Self-Employment section.
2. Click Review next to your business.
3. On the Here's your [business] info screen, click on the box Add expenses for this work.
4. On the Tell us about any expenses screen, mark the box next to Other Miscellaneous Expenses and click Continue at the bottom of the screen.
5. On the next screen, enter information on the bad debt.   

TurboTax Home& Business (CD/Download)

1. Click on the Business tab  > Continue > I'll choose what I work on
2. On the Let's gather your [business] info screen, click the Start/Update button next to Business Income and Expenses.
3. On the screen, Let’s gather your business info, in the Business Income and Expenses section, click the Start/Update button. 
4. Continue to the Here's the business info we have so far screen.  Click on the Edit box next to the business. 
5. On the Your [business type] Business screen, in the Business Expenses section, click the Start/Update box next to Other Common Business Expenses
6. Click Start/Update box next to Other Miscellaneous Expenses.
7. Enter the information on the next screen.

[Kim Vooo]

If I loan money to friend who open business, she's paying interest annually, however she will file bankruptcy soon. In this case, Can I deduct amount as business bad debt or non business bad debt? 

Thanks,  

[Critter-3]

You cannot do anything until the bankruptcy is finalized since you must be listed as a lien holder/creditor. 

[VolvoGirl]

Yes.  You can only deduct up to 3,000 (1,500 MFS) loss per year after any gains you have.  The rest you will have to carryover until it is used up.

[Kim Vooo]

So you are considered this type of loan is nonbusiness bad debt? Well, I lent money to him and earned interest, can I deduct amount as business bad debt? 

[Critter-3]

Are you in the business of loaning money?   Or was this a personal loan?  This will determine how you will handle the failed loan  AFTER  the bankruptcy has been settled so you know how much you will/could recoup.

Read up here :   https://www.irs.gov/taxtopics/tc453

[Kim Vooo]

Personal loan, however, I claimed the interest earned in our income tax. Was that count as business? 

[VolvoGirl]

No that's not a business.   Just personal interest you received.