Can I deduct from my personal taxes money loaned to daughter's startup daycare company as investment loss? Company closed due to COVID and all money loaned was lost.

[mv_holland]

Some money was loaned directly to the LLC.
Some money was loaned to my daughter who then used it for the LLC.
Money was used for initial build out and equipment.
Company was never profitable and closed when parents removed kids due to COVID.

[M-MTax]

Hope you have documentation....you have capital losses.

[Opus 17]

Possibly.  This is a non-business bad debt.  It is entered in the capital gains section on the income page (yes, that's weird, just go with it.)  It's a capital loss that you can deduct against other capital gains.  If you have no other capital gains, you will deduct $3000 this year and carry the rest forward.  (Enter the entire loss, Turbotax will do the carry forward.)

BUT,

With a loan to a family member, if you are audited, expect strict IRS scrutiny.  They will expect to see the loan made in a businesslike manner, as if you had lent money to an unrelated business.  That means signed loan agreements, a fair market interest rate, and other documentation.  You will need to convince this IRS that this was a true loan to a business that you expected to be repaid with interest, and not a "friendly loan" between family members, or worse, a family gift that you are now trying to recover. 

[AmeliesUncle]

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@mv_holland wrote:
Money was used for initial build out and equipment.

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Have you legitimately tried to collect on the loans?  That is required.  That "build out" and equipment should still have some value, allowing that loan to be repaid to you. 

If she just converted that all to personal use, that is even more likely that this will be viewed as a personal gift to your daughter, especially the portion "loaned" directly to your daughter.

[Opus 17]

Agreed, you must make diligent efforts to collect on the loan before the IRS will accept the designation of a bad debt.  I should have mentioned that in my previous answer.  If the “build out” was to her personal home, and then it was converted to personal use, that becomes a gift from you to her. (If you had lent the money to a stranger who had converted it to their personal home, you would sue them.)  Likewise, the equipment should be sold and used to repay as much of the loan as possible before you determine that the remainder is an uncollectible bad debt.

[mv_holland]

The daycare went into a new building.  Up front money was needed for collateral on loan from the landlord (not me) to cover initial buildout costs in the new building.  Up front money was also needed to cover equipment (cribs, mats, rugs, kitchen appliances, etc.).  Per the lease, the landlord keeps all equipment (rookie mistake on our part) so those are nonrecoverable as well.

My personal loan was to daughter's business (she was a sole owner LLC)  did have fair market interest rate.  I had it set up to start repayment after one year but the business lasted just short of a full year so nothing was ever paid back.

[Opus 17]

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@mv_holland wrote:

The daycare went into a new building.  Up front money was needed for collateral on loan from the landlord (not me) to cover initial buildout costs in the new building.  Up front money was also needed to cover equipment (cribs, mats, rugs, kitchen appliances, etc.).  Per the lease, the landlord keeps all equipment (rookie mistake on our part) so those are nonrecoverable as well.

My personal loan was to daughter's business (she was a sole owner LLC)  did have fair market interest rate.  I had it set up to start repayment after one year but the business lasted just short of a full year so nothing was ever paid back.

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You can certainly report the non-business bad debt loss.  If audited, you would need to be able to show this was a legitimate business debt and that you made diligent efforts to collect from your daughter before you declared the debt unrecoverable.  

Also, your daughter should know that money loaned to her that she never repays, becomes taxable income to her, even if it was lost in a bad investment.  You claiming a bad debt loss may trigger the IRS to look for corresponding income on her tax return.