Lent money on an app, accounts have gone into collections

[maggersz]

During the 2019 year, I lent money to strangers on an app. Some of which I had made a positive return of almost $500, in which case an additional $1000 to individuals have gone into collections. I'm currently at about -$500, and I was told that they do not issue a 1099 unless you make over $600. What can I do to claim that -$500 loss on my tax returns?

[ColeenD3]

It depends if what you do is your business. It sounds like this is a money making effort, since it is not made to friends. Plase see this answer by Rick19744

The response depends on your method of accounting for your Sch C activity:

• If you are an accrual basis taxpayer, then you would record this on the "other expense" line and just title it bad debt.
• If you are a cash basis taxpayer, then there is no bad debt because you have never picked this up into income

If you are talking about a loan that you made, then this will become more difficult, but once again you have two options:

• If this was truly a business bad debt, related to your trade or business (loan not repaid OR no chance of repayment), then this would be entered on Sch C other expense line.  You have the burden of proof that this is a business bad debt and there are a number of hoops that you would need to hurdle to prove this.
• If this was a nonbusiness bad debt (same loan not repaid), then this is a capital loss and entered on Sch D and the applicable form 8949.

[maggersz]

Hi Coleen,

Thank you for the response! As this was a personal, non-business loan, would I have to make any additional efforts to show that I don't expect it to be paid? Additionally, since some loans were paid, would I add this income along with the same form? Not sure how I would add this form/type of income into turbotax either.

[ColeenD3]

If this was a personal loan and you got back the same amount you loaned, you have no income. If there was interest, report it as such.

The IRS in the past has not pursued non-business bad debt. In general, it's always better to have back-up if you need it. Non-business bad debt is reported on Schedule D.

• Report this in TurboTax by using these steps:
  • In the search box, upper right type nonbusiness bad debt > Jump to nonbusiness bad debt
  • Continue to the screen Choose the type of investment you sold
  • Select Uncollectible Debt (Nonbusiness Bad Debt)
  • Continue to enter your information.  

From DianeW:

You can take a deduction for a nonbusiness debt only if the entire debt is uncollectable. You do not have to wait until the entire debt is overdue to determine whether it is worthless. Nor do you have to file a lawsuit to collect the debt, obtain a judgment against the debtor, and then try, unsuccessfully, to collect on it — a process that can take years.

All that is required is for you to show that there is no longer any chance that the loan will be repaid. Obviously, you must show that you took reasonable steps to collect the debt. 

[maggersz]

What would constitute as reasonable steps? Everything is done through the app. With the app, if the loan is overdue, the app sends weekly texts to try and collect. After a certain period, the loan is then sent to a collection agency to try to collect on the loan. Would this be reasonable enough, and would I have to show this in any way?

[AmyC]

Since you loaned money through an app that you do not own, you are very limited in the steps you can take. If you are going to continue to lend money through this app, that would show confidence in possibly getting the money back.

You need to determine what your future actions will be to support any claims on your taxes.Loaning money to a friend is not a deduction. These are not friends.

You must decide if a $500 write off is worth cutting ties to the app or lose the deduction and continue using the app.

[fanfare]

The reasonable efforts were put forth by the app acting as your agent.
You'll have to attach a written explanation of same ; this may force you to file on paper.

[maggersz]

Thanks for letting me know about the choices. So I did stupidly make one loan a month ago, in which it was repaid. But at this point, I'd much rather take the $500 as a deduction. I was wondering then if it's too late? Or if it is, would it be possible to deduct the loan for 2020 taxes?