Forgive a loan to a non-profit, or bad debt?

[jspencergreene]

I have given a loan(s) of approximately $60,000 over the years to a local small non-profit organization. I and the organization had expected to repay the amount. However, the huge financial burned the COVID period put on this organization, I doubt the small non-profit now will ever be able to repay. If I decide to forgive part or all of this loan, how would be the best way to deduct that and put it in my tax return? If I do the entire amount, it would exceed my probably annual AGI, before it is applied. Would it be better to break it up over several years, or, would it be better to consider it non-business bad debt? What is the best way to proceed. I probably would not do this, until the 2025 tax year, so it would be applied to the 2025 tax return. 

[Mike9241]

This might be a nonbusiness bad debt. Hope you have paperwork to support the loans if you write it off and are audited. Also, if these loans may have required you to recognize interest income each year even if not paid. IRC section 7872

non-business bad debt is:

1) is a legal obligation (what does state law say) for a fixed amount of money to be repaid

2) is totally worthless (have you made attempts to collect some or all  - if not the iRS could deny any deduction

a NBBD is treated as a short-term capital loss. There must be proof that the debt had value at the beginning of the year and no value at the end of the year

statement required per reg 1.166-1(b)(1)

1) describe the debt. amount and due date

2) Debtor's name and your relationship to the debtor

3) description of efforts made to collect the debt; and

4) an explanation as to why the debt is worthless.

see IRSPUB 550