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Deducting Bad Debts
Q:
Subject: declaring bad loans
Hi
we have made some loans guaranteed by mortgages. However these are in different countries.
The amounts are quite large. Basically I have lost the money and the individuals are nowhere to be found. We are speaking in the hundred of thousands of dollars. the loans were securied by foreign real estate. The foreign country is Lebanon and in a semi state of war or civil unrest so it is hard to foreclose as well.
How can I take a deduction on my taxes. I have not declared the interest income. I am thining of filing a 1040 X for last year and declaring the interest income. Have not filed 2007 taxes this year and am getting ready to do so. I want to take a the bad loan deduction in 2008
Do not want the deduction to trigger an audit.
can you help.
A:
You need to be working with an experienced professional tax advisor to make sure you do things properly here.
Interest income that has accrued on the notes but hasn't been received does not need to be reported as income on your 1040. However, if you did receive actual interest payments, those should be reported for the years in which they were received. If that is the case, you should file amended Federal and State income tax returns to correct that situation. You will have to pay the additional taxes plus interest, but IRS and most states will waive late penalties if you voluntarily disclose the under-reported income rather than wait for them to catch you.
Writing off investments as uncollectible and worthless can trigger an IRS audit if the tax return doesn't include a lot of attached documentation as to why you have concluded that 2008 is the appropriate year it became completely worthless and how you calculated your unrecovered adjusted basis. IRS loves to disallow bad debt deductions for either being claimed too early or too late. A good tax pro can help you document the proper year to claim the loss. A good tax pro can also ensure that you are claiming the proper amount. A common mistake people make is to try and claim a bad debt loss for accrued but unpaid interest. That is not allowed.
Good luck. I hope this helps.
Kerry Kerstetter
Labels: Deductions
- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 2/14/2009 12:42:00 PM Send this post:
