Can I take remainder after debt settlement as a loss on taxes... ?

That is, say a debtor owes me $10,000.

I agree to settle for $6,000.

Can I take the $4,000 as any kind of deduction? Business loss, unpaid debt, etc.? Can I also deduct (from my taxes as a loss) any attorney fees, if the original agreement, and subsequent judgments that the agreement is valid, agree(s) that debtor pay all attorneys' fees in the event of default?

I lived in MS and the debtor lived in GA at the time of the agreement; I live in CA and the debtor lives in FL, if that's relevant.

Thanks for your help!

Reply to
Hooliganz
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Why does he owe you $10,000? Was that $10,000 ever income to you?

If you worked for him and the contract said you get $10,000, then no, the $6,000 is taxable income, the $4,000 has no tax effect. If you lent him $10,000 cash, then the $4,000 is a loss. (What type depends on why you lent it.)

Seth

Reply to
Seth

Yes, it was a nonbusiness personal loan with a contract and everything. Regrets for the muddiness of the question.

So let's say I settle for $6,000.

And the attorneys take their 40% -- $2,400.

I can deduct the $6,400 ($10,000-$3,600) as a capital loss?

And I assume agreeing to settlement, absent any terms prohibiting such specifically, does not preclude me from doing so?

Thanks again.

Reply to
Hooliganz

Assuming the 10k is income. If you're an accrual basis taxpayer, then you would have recorded the 10k as profit when the profit was signed. Upon receiving 6k there is only a loss of 4k to record. If you're a cash basis taxpayer (most common for individuals), then the 6k is income, and the 4k is not recorded. Sounds right?

Reply to
removeps-groups

Where does $3,600 come from? Your capital loss is just $4,000. The attorney fees at 40% of $6,000, or $2,400, may be deductible on Schedule A misc expenses subject to the 2% of AGI limit (only the amount above 2% of your AGI is deductible), and furthermore the deduction is not allowed under AMT. However, in order to be deductible the expense must meet the conditions below, and I think (2) would qualify it to be deductible.

Other Expenses

You can deduct certain other expenses as miscellaneous itemized deductions subject to the 2%-of-adjusted-gross- income limit. These are expenses you pay:

  1. To produce or collect income that must be included in your gross income, 2.

To manage, conserve, or maintain property held for producing such income, or 3.

To determine, contest, pay, or claim a refund of any tax.

Reply to
removeps-groups

However, you do get to issue the borrower a 1099 showing $4,000 "cancellation of debt income".

Seth

Reply to
Seth

Is OP a financial institution? If not, forget the 1099.

Reply to
Arthur Kamlet

Better yet, just report to the IRS that the borrower (probably) didn't report the cancellation of debt income, and collect a cut of the taxes, interest, and penalties the IRS collects as a result.

Seth

Reply to
Seth

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