Friend Flaked

Today TaxMama hears from Jeanne in San Diego who asks, “How do I write off a loan I made to a friend. I lent her $2,500 that she never paid back to me – and I cannot collect it?

Aw Jeanne,

That’s a real shame. Are you still friends?

Before IRS will accept a bad debt, they need to see that you’ve made a good-faith attempt to collect it – otherwise, they would regard it as a gift.

So build a record of documents.

Send your friend a written demand requesting the payback?
Keep a copy for your files.

File in small claims court to collect it.

Unless your friend filed bankruptcy. Be sure to get a copy of the letter from the court addressed to you as a creditor.

Another way to let them off the hook is if she is insolvent – and are willing to put that in writing.

Of course, all of those things can be humiliating to both you and your friends. But if she can’t afford to repay you, a real friend will swallow her pride and get you the documents you need.

Once you have a record of having made an honest effort to collect it, use Schedule D, showing the date you made the loan as the purchase date. Use the $2,500 as the cost. Put -0- in the sales price. This will result in a loss of $2,500.
http://ftp.fedworld.gov/pub/irs-pdf/f1040sd.pdf

Most likely, a transaction that small will not attract audit. But if you are audited, you will need to have written proof, both of the loan and the fact that you cannot collect it.

And, remember, you’ll find answers about all kinds of tax issues, free. Where? Where else? At TaxMama.com

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