I have a small business helping startups. Being close to these startups, I invested in a few of these very early stage startups using my "business" checks (not my personal savings account). These startups have since gone under.
How do I write these investments off ? Since the checks were written thru my business account, do I have to write it off thru my business ? Do they have to be written off via my business ? Like Schedule C ? or thru the non business section of form 1040 like in IRC Section 1244 ? Pls let me know.
How you write off these investments will depend on what your intention was, what type of entity it was, and what you received, if anything, when you invested the funds. Was your money an investment or a loan? If it was an investment you should have something that resembles a stock certificate or a notice from the company that you own a certain number of shares of stock. If the company was an S Corporation you should also have a 1120S Schedule K-1 showing your share of the pass through items. If the company was a partnership or LLC and you were an investor, you should have a copy of the operating agreement that spells out your percentage of ownership and again you should have a 1065 Schedule K-1 showing your share of the pass through items. In either of these cases you would first account for your pass through items as shown on the K-1. Any remaining basis would be deductible either as an investment loss on Schedule D or as an ordinary loss on Form 4797. NOTE that you can only use Form 4797 for an ordinary loss IF you were an original recipient of the stock directly from the company AND you meet all of the other IRC Sec. 1244 rules. Absent a stock certificate, operating agreement or K-1 it is likely that your money was really a loan. In this case you really should have a loan document. The bad debt arising from a worthless loan is usually treated as a short term capital loss regardless of how old the loan actually is. The next thing you need to consider is what type of business entity YOU have. Your post indicates that you report on a Schedule C. If that is the case then even though you may have a real business the loan is still treated as a personal nonbusiness loss and goes on Schedule D as a short term bad debt. For nonbusiness bad debts the IRS likes to see what you've done to try to collect. This usually includes the existence of a note detailing the loan and letters trying to collect the debt. You should also consider suing those that owe you this money. If you've done nothing to collect the IRS could take the position that the money you put in was a gift and is NOT deductible. There are also other considerations that need to be factored in. I would strongly suggest that you meet with a local tax pro who can review your situation and help you determine the correct treatment. This is a convoluted area of tax law and should NOT be undertaken by the uninitiated. Good luck, Gene E. Utterback, EA, RFC, ABA
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