Can anyone tell me how I can record write off of a personal loan I made to my company in my 2019 tax return? I am closing the company with the 2019 K1 filing.

[RobertG]

It can be claimed on a business schedule as a business bad debt or on schedule D as a non-business bad debt.

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. 

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.

To support the claimed bad debt deductions, you need to show that: (1) the Loans were properly treated as debt for federal income tax purposes, and (2) that they became worthless during the taxable year. 

Be sure you have not already written off the loan by claiming losses from the business.  You can't deduct it twice.

[TahoeJeff]

Hi Robert - what type of support for the loan failure would be required?  Do you need to somehow add an explanation and some accounting for the loss? What would you expect to do for such a failed loan? Mine was through a crowdfunded raise so I do have access to some info and explanations from them. Thanks

[Opus 17]

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@TahoeJeff wrote:

Hi Robert - what type of support for the loan failure would be required?  Do you need to somehow add an explanation and some accounting for the loss? What would you expect to do for such a failed loan? Mine was through a crowdfunded raise so I do have access to some info and explanations from them. Thanks

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You'll need to provide more information about your situation.  A loan to the company you work for that is not owned by you would be treated very differently than money you "loan" to your own unincorporated sole proprietorship or single member LLC. 

[TahoeJeff]

Thanks, I found the guidance in the IRS Pubs. This is an investment note that was defaulted on and deemed worthless.  Looks like I need to provide some additional support and info for the note.

[Opus 17]

There is a significant difference between how you would handle a personal loan that was defaulted or an investment that is now worthless.  You can deduct a worthless personal loan as a non-business bad debt as an itemized deduction on schedule A.  You would deduct a worthless investment as a capital loss on schedule D.  A bad debt is fully deductible in the year it occurs, but only if your other itemized deductions are already more than the standard deduction.  A schedule D capital loss is deductible against schedule D capital gains. If you have no capital gains, then you can only deduct $3000 of the loss this year, but the remaining amount carries forward until you use it up.

If you already itemize your deductions, the bad debt treatment gives you the full deduction all at once, and is often more favorable.   However, it will almost certainly cause the IRS to take a second look at your tax return.  You will need extensive documentation that this was a bona fide loan that was handled in a businesslike manner and that you made diligent efforts to collect on the loan. If anything about the paperwork looks like an investment and you are audited, the IRS will almost certainly change the treatment of the loss to a schedule D capital loss.