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Can I write off a defaulted promissory note as a bad debt expense?

B Wool's Profile

I obtained a promissory note in return for a business loan of which the debtor has since defaulted. I obtained a summary judgement which has since been vacated due to inadequate notice to the Debtor. It now seems it is a duck in a dry pond. Can I write this off as a personal Bad Expense? Will a tax implication "pass through" to the Debtor who defaulted?

Answers

Topic Expert
Wayne Spivak
Title: President & CFO
Company: SBAConsulting.com
LinkedIn Profile
(President & CFO, SBAConsulting.com) |

As a defaulted business loan, you can write the loss down. That will flow to a reduced net income; how it flows to you personally depends on the company structure. Make sure you keep all the documentation should you get audited.

Since the loan defaulted, I would (check with your attorney, tax advisor) send the Debtor a 1099-Misc, since you provided him with what now is essentially income.

Jeff Redman
Title: Project Lead Estimator
Company: Crawford Consulting Services, Inc
(Project Lead Estimator, Crawford Consulting Services, Inc) |

Propably a capital loss for you, subject to annual $3,000 deduction limitation of the amount exceeding capital gains.

Issue debtor a 1099-C for his cancellation of debt income;

Topic Expert
Wayne Spivak
Title: President & CFO
Company: SBAConsulting.com
LinkedIn Profile
(President & CFO, SBAConsulting.com) |

David, you are indeed correct, it is a 1099-C. Thanks for clarifying (never needed to do one :) )

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