Question

Mary incurred a $20,000 business bad debt in 2018, which she deducted in full. During 2019, she unexpectedly collected $12,000 on the debt. As a general rule, how should Mary account for the collection?

a.         She need not report anything, because she still has a loss.

b.         She must reduce her 2018 deduction to $8,000.

c.         She must report the $12,000 recovery as ordinary income in 2019.

d.         She must report the $12,000 recovery as capital gain in 2019.

e.         She must report the $12,000 recovery as ordinary income in 2018.

Answer 1

As Mary unexpectedly collected the dept which she has already deducted in full then the amount collected is to be shown as ordinary income in the year in which the amount has been recovered. therefore she must report the amount of $12000 as a ordinary income in 2019.

As she has already directed the bad debts in 2018 therefore no adjustments to be made in 2018 because the recovery has been recovered in 2019. Moreover the recovery is a normal course of business operation and therefore will be treated as ordinary income and not as a capital gain.

So the correct option is C