Non business bad debt vs bad business debt

It may be neither.  Your promissory note may be considered an equity investment, in which case your loss would be deemed a capital loss. However, whether your promissory note is an equity investment or not requires a legal analysis and a legal analysis is something we cannot provide.  

 

Generally, to claim a business bad debt, the loan which created the debt must be advanced in connection with the taxpayer's trade or business. Thus, unless your business involved lending funds or the lending was done for some other reason, but it was all done in connection with your business, it may be difficult to prove this was a business bad debt.   To help you in deciding what position to take, here is a link to an IRS webpage that addresses business and non business bad debts.  

 

Bad Debt Deduction

 

If you take the position that your promissory note was a business bad debt, here are the step to follow in TurboTax CD/download to report the debt on your tax return.

 

1. Click on the "Business" tab
2. Click on "Continue"
3. Click on "I'll Choose What I Work on"
4. Locate "Business Income & Expenses" heading, click on "Update or Start"
5. Click "Edit" next to your business name or if none click "Add Business
6. Scroll down to "Business Expenses" section
7. Click "Start" next to Other Common Business Expenses
8. Scroll down to Other Miscellaneous Expenses
9. You will enter the description of the bad debt and the amount on the next screen.

@FF16 

here's a link to an old article in the Tax Advisor. note that the Ninth court ruling was saying it's an employee business expense. as such under current law you would get no deduction because the deduction for employee business expenses have been eliminated through 2025.    other issues: type of corporation C-Corp or S-Corp.  with an S-Corp your tax basis in that loan may have been reduced because you used it as basis to take deductions for the losses of the S-Corp. thin capitalization - how high was the debt to equity ratio? Tax courts have held that in some cases with high debt to equity ratios loans are really capital contributions treated like stock. there could be other issues as well 

https://www.thetaxadviser.com/issues/2011/may/casestudy-may2011.html#:~:text=Practice%20tip%3A%20Shareholders%20may%20do%20better%20making%20a,take%20an%20ordinary%20loss%20deduction%20for%20the%20stock.