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Investor paid $20K and was promised $5K interest but embezzled $35595 from checking account. Where do I enter loss? No invoices, expenses, etc.

This money was given to my client's business and in return the $5K was to be in 90 days but he went to bank in about 45 days and withdrew that money without giving my client any receipts/expenses, etc.  

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Investor paid $20K and was promised $5K interest but embezzled $35595 from checking account. Where do I enter loss? No invoices, expenses, etc.

It may be too early to do anything on his 2016 taxes if the matter isn't settled yet.

Also, you may need to refer this to his attorney.  There is a lot going on here and it is not simple at all.  You say that Mr. Jones "invested" $20,000 with your boss Mr. Smith on the promise of 25% interest in 90 days.  (That sounds shady to begin with.)  But then Mr. Jones invaded Mr. Smith's bank account and withdrew $38,000 "without receipts".  You also never say if the business was a schedule C sole proprietorship, or an LLC, S corp or C corp.  

So it's not clear whether Mr. Jones invested in the business, or loaned the business money, or became a partner in the business (which are three different things). And it's not clear whether the $38,000 was embezzlement by a partner, or theft by an unrelated person who got hold of banking information.  And it's not clear whether your boss's actual loss is $38,000 or $18,000.

The tax treatment of business bad debts is different from the treatment of theft.  If this is theft from Mr. Smith personally, it can be deducted on his personal tax return subject to 2 deductibles, 10% of adjusted gross income and $100.  But if he recovers money later in court, that money has to be added to his taxable income in the year of the recovery.

If this is theft from the business, it is a deductible expense against the business.  The same rule about any recovery being taxable applies.

If this is a disputed business debt, then it can't be dealt with on the tax return until it is finalized in court and the final about of loss is determined.  If there is a judgement against Mr. Jones, the debt still can't be deducted until a final determination is made that the debt is uncollectible, and only after making reasonable efforts to collect the debt.

I don't think you want to be dealing with this.  And I don't think you even want to be doing Mr. Smith's personal taxes, there are too many mistakes you could get blamed for.

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7 Replies

Investor paid $20K and was promised $5K interest but embezzled $35595 from checking account. Where do I enter loss? No invoices, expenses, etc.

"my client" ?  Are you a paid preparer?

Investor paid $20K and was promised $5K interest but embezzled $35595 from checking account. Where do I enter loss? No invoices, expenses, etc.

TT is not licensed for use by paid tax preparers. However I hope the "client" has filed a police report, insurance claim, and/or a civil suit.

Investor paid $20K and was promised $5K interest but embezzled $35595 from checking account. Where do I enter loss? No invoices, expenses, etc.

Who is who?  How did the embezzler get the bank info?

Investor paid $20K and was promised $5K interest but embezzled $35595 from checking account. Where do I enter loss? No invoices, expenses, etc.

OK, I said my client but he actually works for me as a manager for one of my Divisions (Solar).  I keep our accounting in Quickbooks and I'm doing his 2016 taxes both personally and his old business.  I'm not a paid tax preparer or I wouldn't be asking these questions.  I'm just going to reduce his salary next month.  So he trusted him to give him access to the bank account to deposit and use for materials.  They were "friends"  BUT the lawsuits are going good for my manager.  When this happened he couldn't pay his vendors or other employees and couldn't finish the job he was on and closed the business.  Make sense now?  Sorry for the confusion.  It's been going on since Nov of 2016!!  The "embezzler" is facing several felony charges and my manager is being sued as well for the money he owes them.

Investor paid $20K and was promised $5K interest but embezzled $35595 from checking account. Where do I enter loss? No invoices, expenses, etc.

It may be too early to do anything on his 2016 taxes if the matter isn't settled yet.

Also, you may need to refer this to his attorney.  There is a lot going on here and it is not simple at all.  You say that Mr. Jones "invested" $20,000 with your boss Mr. Smith on the promise of 25% interest in 90 days.  (That sounds shady to begin with.)  But then Mr. Jones invaded Mr. Smith's bank account and withdrew $38,000 "without receipts".  You also never say if the business was a schedule C sole proprietorship, or an LLC, S corp or C corp.  

So it's not clear whether Mr. Jones invested in the business, or loaned the business money, or became a partner in the business (which are three different things). And it's not clear whether the $38,000 was embezzlement by a partner, or theft by an unrelated person who got hold of banking information.  And it's not clear whether your boss's actual loss is $38,000 or $18,000.

The tax treatment of business bad debts is different from the treatment of theft.  If this is theft from Mr. Smith personally, it can be deducted on his personal tax return subject to 2 deductibles, 10% of adjusted gross income and $100.  But if he recovers money later in court, that money has to be added to his taxable income in the year of the recovery.

If this is theft from the business, it is a deductible expense against the business.  The same rule about any recovery being taxable applies.

If this is a disputed business debt, then it can't be dealt with on the tax return until it is finalized in court and the final about of loss is determined.  If there is a judgement against Mr. Jones, the debt still can't be deducted until a final determination is made that the debt is uncollectible, and only after making reasonable efforts to collect the debt.

I don't think you want to be dealing with this.  And I don't think you even want to be doing Mr. Smith's personal taxes, there are too many mistakes you could get blamed for.

Investor paid $20K and was promised $5K interest but embezzled $35595 from checking account. Where do I enter loss? No invoices, expenses, etc.

I highly recommend you seek professional assistance in this matter.  Doing anything wrong could cost you much more later either in taxes, penalties & interest   or  may jeopardize the case.

Investor paid $20K and was promised $5K interest but embezzled $35595 from checking account. Where do I enter loss? No invoices, expenses, etc.

WOW, OPUS & Critter#2.!!!!  You scared me enough!!  I'll let my manager know in the morning that I will do nothing regarding this matter until his lawyer calls me and then I can submit his taxes without any of this stuff..  Thank you so very much for your insight!!!
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