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.
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
So what situation would this be considered a "business" bad debt expense? I have a similar situation, but my business was structured as an S-Corp LLC