Nonbusiness bad debts are deducted as short-term capital losses on Federal Schedule D (Form 1040) Capital Gains and Losses. You may claim a loss from bad debt only in the year the debt becomes totally worthless. If you have a loss from a nonbusiness bad debt, you deduct it from capital gains, if any, and then up to $3,000 of other income (the TaxAct program will do that for you automatically once you have entered the bad debt amount(s) as instructed below). Any excess is deductible as a capital loss carryover in later years. You can obtain additional information in IRS Publication 550 Investment Income and Expenses (Including Capital Gains and Losses).
In the IRS Topic No. 453 Bad Debt Deduction, the IRS offers a few considerations:
- Nonbusiness bad debts must be totally worthless to be deductible. You can't deduct a partially worthless nonbusiness bad debt.
- Use a separate line for each bad debt.
- A nonbusiness bad debt deduction requires a separate detailed statement attached to your return. The statement must contain: a description of the debt (including the amount and the date it became due), the name of the debtor (and any business or family relationship between you and the debtor), the efforts you made to collect the debt, and why you decided the debt was worthless.
To report nonbusiness bad debt in the TaxAct program (if you need help accessing Form 1099-B, go to our Form 1099-B - Entering Capital Gains and Losses in Program FAQ):
- From within your Form 1099-B, continue with the interview process until you reach the screen titled Enter the transaction details, one sale at a time.
- Under Term and Type, clickC - Short-term transaction for which you did NOT receive a Form 1099-B.
- Under Investment Details, type the name of the debtor, but leave Date acquired, and Date sold or exchanged blank.
- Under Transaction Details, click the data entry field below Cost or other basis, and type the unrecovered loan amount.
- Under Other Details, click the checkbox next to Reporting a nonbusiness bad debt. Continue to the next screen.
- On the screen titled Investment Sales - Nonbusiness Bad Debt, enter the bad debt information to be included with your tax return, and continue with the interview process to enter your information.
The loss will be reported on Form 8949 Sales and Other Dispositions of Capital Assets and Schedule D. It will then transfer to Form 1040 U.S. Individual Income Tax Return, Line 7 (up to negative $3,000). The TaxAct program will include the Bad Debt Statement with your electronically-filed tax return. If you file a paper return, the Bad Debt Statement will print with your return.
Related Links
- Schedule C (Form 1040) Profit or Loss From Business
- Topic No. 409 Capital Gains and Losses
Note that any link in the information above is updated each year automatically and will take you to the most recent version of the webpage or document at the time it is accessed.
