Amy owns 20% of the stock of Wren Corporation, which she acquired several years ago at a cost of $10,000. Amy is vice president of Wren and earns a salary of $80,000 annually. Last year, Wren Corporation was experiencing financial problems, and Amy loaned the corporation $25,000. In the current year, Wren becomes bankrupt, and both her stock investment and the loan become worthless. Amy has a nonbusiness bad debt deduction this year of
$25,000.

Question

Quizplus · Accepted Answer

Amy's loan to the corporation would be considered a business bad debt since she is an employee (vice president) and has a significant stake in the company (20% ownership). Nonbusiness bad debts are typically reported as short-term capital losses, but in Amy's case, the loss is related to her business activities with the corporation.

Amy Owns 20% of the Stock of Wren Corporation, Which