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 enter this information on Form 1099-B, which will transfer the data to Form 8949 and Schedule D:
- From within your TaxAct return (Online or Desktop), click Federal. On smaller devices, click in the upper left-hand corner, then click Federal.
- Click Investment Income in the Federal Quick Q&A Topics menu to expand, click Gain or loss on the sale of investments to expand, then click Capital gain or loss (Form 1099-B).
- Click + Add Form 1099-B to create a new copy of the form or click Edit to review a form already created.
- Continue with the interview process to enter all of the appropriate information.
- On the screen titled Investment Sales - Transaction Details, enter the name of the debtor for the Description, leave both Date acquired and Date sold or exchanged blank, check Reporting a nonbusiness bad debt, then click Continue.
- On the screen titled Investment Sales - Reporting Category, select "C - Short-term transaction for which you did NOT receive a Form 1099-B" from the Form 8949 category drop-down (see paragraph beneath), then click Continue.
- On the second screen titled Investment Sales - Transaction Details, enter the Cost or other basis unrecovered loan amount, then click Continue.
- On the screen titled Investment Sales - Nonbusiness Bad Debt, enter the bad debt information to be included with your tax return, then click Continue.
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.
Note that any link in the information above is updated each year automatically and will take you to the most recent version of the document at the time it is accessed.