Question

1. John incurred $10,000 of business bad debts for his business which operates as a sole proprietorship. How are these treated on John’s 2018 tax return:

Deducted as a long term capital loss

Deducted as a short term capital loss

Deducted as a trade or business expense on John’s Schedule C

Not deducted on John’s 2018 tax return.

2. Martha loaned her friend, Joan, $30,000 three years ago. Joan used the money to start a business on Etsy. After three years, Joan’s business is bankrupt and lets Martha know that she will not be repaid. How should Martha treat this transaction for tax purposes?

Deducted as a long term capital loss

Deducted as a short term capital loss

Deducted as a trade or business expense on Martha’s Schedule C

Not deducted on Martha’s 2018 tax return.

3. On June 1 of the current year, Tab converted a machine from personal use to rental property. At the time of the conversion, the machine was worth $90,000. Five years ago, Tab purchased the machine for $120,000. What is the basis of the machine for cost recovery?

$70,000

$90,000

$120,000

$140,000

Answer 1

1. If John is able to claim the bad debt on his tax return, then he will need to complete Form 8949, Sales & other Dispositions of Capital Asset. The bad debt will then be treated as short term capital loss by first reducing any capital gains on return & then reducing up to $3000 of other income.

2. It will be deducted as a long term capital loss. As it is more than one year thus treated as long term loss because it can't be paid any more.

3. The basis of an asset is the value of the asset subject to cost recovery. The initial basis is what you paid for the asset plus any other expenses incurred acquiring the asset.

Thus, in this case basis cost is $120000.