Question: Howard loaned $8,000 to Bud two years ago. The terms of the loan call for Bud to pay annual interest at 8%, with the principal

Howard loaned $8,000 to Bud two years ago. The terms of the loan call for Bud to pay annual interest at 8%, with the principal amount due in three years. Until this year, Bud had been making the required interest payments. When Howard didn’t receive this year’s payment, he called Bud and found out that Bud had filed for bankruptcy. Bud’s accountant estimated that only 40% of his debts would be paid after the bankruptcy proceeding. No payments were received. In the next year, Howard received $2,700 in full satisfaction of the debt under the bankruptcy proceeding.

What deductions are allowed to Howard, assuming that the debt was

a. Related to Howard’s business?

b. Unrelated to Howard’s business?

c. How would your answers to parts a and b change if Howard received $3,300 in satisfaction of the debt in the next year?

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