Because you as the individual, sold your business, this is considered a nonbusiness bad debt and is entered as a short-term capital loss. The instructions on how to enter this are detailed below.
-
Federal
Taxes (Personal
if using Home & Business)
-
Wages and
Income (Personal
income if using Home & Business)
- I'll choose
what I work on
- Scroll down to Investment
Income
- Click Start/update across
from Stocks, Mutual Funds, Bonds, Other
- At 'Choose the type of
investment you sold', select 'Uncollectible Debt (Nonbusiness Bad
Debt)'
- Enter the name of the debtor
and other information requested.
- If there were to be
multiple loan payments versus a single lump sum, enter various at the
'Date the Debt Became Due'
- These entries will generate
the statement that is required. (see below)
-
Regarding the amount that you were unable to collect - The bad debt amount is your original amount plus any accrued interest up to the date that the debt was deemed worthless and minus any payments that were made. If it was written into your agreement that the borrower would pay legal and collection fees, you may include them in the total entered here. If collection expenses were not part of your contract see instructions for entering the legal portion of your collection expenses as 2% Miscellaneous Itemized Deductions, below.
For each nonbusiness 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.
IRS
- Pub 550 - Nonbusiness Bad Debt
Enter the attorney expenses as part of
Miscellaneous Itemized Deductions
- Go
to Federal Taxes (Personal if using Home & Business)
- Deductions and
Credits
- Scroll down to
Other Deductions and Credits
- Click start
across from Legal Fees
Something else to note:
Legal Fees are part of Miscellaneous Itemized Deductions which
must be a minimum of 2% of your Adjusted Gross Income to be included in your
Schedule A. The total of Miscellaneous Itemized Deductions is combined with
other Schedule A / Itemized deduction amounts which include Mortgage Interest,
Real Estate Taxes, Charity and other Donations and more.
The IRS allows you either a Standard Deduction or Itemized
Deduction whichever is higher. TurboTax will default to which ever gives you
the highest deduction, the total of Itemized Deductions or your Standard
Deduction.
This year the standard deduction
for:
- Single or
Married Filing Separate - $6,300
- Married Filing
Jointly or Qualifying Widow(er) - $12,600
- Head of
Household - $9,250
[Updated 3/2/16]
