If you have a non-business bad debt, you can take the deduction when the debt becomes totally worthless.
Nonbusiness Bad Debts - All other bad debts
are nonbusiness. Nonbusiness bad debts must be totally worthless to
be deductible. You can't deduct a partially worthless nonbusiness
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 nonbusiness 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.
IRS Service Center
Advice (SCA) 1998-020 addressed whether “an individual
or entity not required to file a Form 1099-C under
Section 6050P of the Internal Revenue Code [may]
nevertheless voluntarily file the form.” SCA 1998-020
discusses Sec. 6050P, what information needs to be filed
with the Form 1099-C, and what constitutes an
identifiable event. The memorandum states that,
While the requirement to
report discharges of indebtedness applies only to the
entities described above, there is no specific
prohibition in the Internal Revenue Code or the Income
Tax Regulations that forbids the reporting of discharges
of indebtedness by entities not required to report. Such
reporting may encourage voluntary tax compliance and
proper gross income inclusions.
- See more at:
http://www.thetaxadviser.com/issues/2012/dec/clinic-story-11.html
