Yes, you claim a loss for the noncollectable debt. Non-business bad debts must be totally worthless to
be deductible. You can't deduct a partially worthless non-business
bad debt.
A debt becomes worthless when the surrounding facts and circumstances
indicate there's no reasonable expectation of payment. To show that
a debt is worthless, you must establish that you've taken reasonable
steps to collect the debt. It's not necessary to go to court if you
can show that a judgment from the court would be uncollectible. You
may take the deduction only in the year the debt becomes worthless.
You don't have to wait until a debt is due to determine that it's
worthless.
Report a non-business bad debt as a short-term capital loss on Form 8949 (PDF), Sales and Other Dispositions
of Capital Assets, Part 1, line 1. Enter the name of the debtor
and "bad debt statement attached" in column (a). Enter your basis
in the bad debt in column (e) and enter zero in column (d). Use a
separate line for each bad debt. It's subject to the capital loss
limitations. A nonbusiness bad debt deduction requires a separate
detailed statement attached to your return.
To enter in TurboTax Online, while logged in and working in your return:
- Click on "My Account"
- Type in "bad debt, non-business" in the Topic Search window and click GO
- On the following screen click on "+ Add an Account"
- Answer NO to "Did you get a 1099-B or brokerage statement...?"
- Mark the radio button next to "Uncollectible Debt (Nonbusiness Bad Debt)"
- Enter you loan information and click Continue
A non-business bad debt is deductible as a short-term capital loss
no matter how long the debt was owed to you. Capital losses are limited
to $3,000 ($1,500, if married filing separately) more than capital
gains per year.
