Mary incurred a $20,000 nonbusiness bad debt last year.She also had an $8,000 long-term capital gain last year.Her taxable income for last year was an NOL of $15,000.During the current year,she unexpectedly collected $12,000 on the debt.How should Mary account for the collection?

Question

Quizplus · Accepted Answer

Nonbusiness bad debts are treated as short-term capital losses.Hence,the $20,000 bad debt can offset the $8,000 of long-term capital gains.Because Mary has an NOL,she cannot use $3,000 of the remaining loss to offset any ordinary income.Therefore,the tax benefit was only $8,000 and $8,000 would be recognized as income.

Mary Incurred a $20,000 Nonbusiness Bad Debt Last Year