Non-Business Bad Debt Write-Off

Sometimes, you loan money to friends and relatives. But it may happen that you don't get your money back and incur a loss. For your relief, you can recover your loss by claiming a write off to your tax return because of bad debt.

Non-business bad Debt
If bad debt is completely unrelated to business operations or activities, it is considered as a non-business bad debt or a personal bad debt. It is quiet possible for taxpayers to loan money to other family members or friends for the purpose of getting it back. This can't be qualified as business debt as it is not connected to your business. They are personal loans.

There are two kinds of bad debts – business and no business. A business bad debt in general is created as part of the operations of your trade or business.

To claim for non-business bad debt write-off in tax return

There must be a true relationship between the creditor and the debtor if you lend money to someone. You must have bona fide documents showing the debtor's obligations towards your money. The main intention is to determine that you have lent money to be repaid, and not as a gift. The document can contain details of

The size of loan amount
Who has taken the loan?
When and how the loan need to be repaid

If you have already recorded the amount in your income or loaned out your cash, bad debt can be deductible in income tax.

To write off non-business bad debt in tax return, it must be totally worthless in that year. Unlike business bad debts, partially worthless non-business bad debts are non-deductible.

How to write off non-business bad debt

Identify the size of loan amount. The debt must be a loaned out money or amounts previously included in your income. If you are a cash method taxpayer, then you can not get deduction in tax.
Establish that the debt is totally worthless and can not be collected in the future. The deduction occurs only in the year in which the debt becomes totally worthless. You must have proper evidence to show your attempts to collect the money.
A non business bad debt is reported as a short-term capital loss in income tax document. File a claim for the deduction in your income tax return.
Attach a separate detailed statement to the tax return for the non business bad debt deduction

Note : You can file a claim for refund if you realize that the debt actually became worthless in a previous tax year and not in the current year.