Your clients, Tom and Teri Trendy, have a 20-year old son, Tim. Tim lives in Hawaii, where he studies the effects of various sunscreens on his ability to surf. Last year, Tim was out of money and wanted to move back home and live with Tom and Teri. To prevent this, Tom lent Tim $20,000 with the understanding that he would stay in Hawaii and not come home. Tom had Tim sign a formal note, including a stated interest rate and due date. Tom has a substantial portfolio of stocks and bonds and has generated a significant amount of capital gains in the current year. He concluded that Tim is a deadbeat and the $20,000 note is worthless. Consequently, Tom wants to report Tim’s bad debt on his and Teri’s current tax return and net it against his other capital gains and losses. Tom is adamant about this.

Questions to answer:

Would you sign the Paid Preparer’s declaration (see example above) on this return reporting Time's bad debt? Why or why not?

Would this loan be reported as a business bad debt or a nonbusiness bad debt? Explain the different between the two types of bad debts, and how each is treated for income tax purposes.

Answer rating: 100% (QA)

1 No I would not sign the paid preparers declaration Explanation signing the return in the status of ... View the full answer