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

Mary should report $8,000 as income because she previously deducted the bad debt as a short-term capital loss, which offset her long-term capital gain. The recovery of the debt is taxable to the extent of the previous tax benefit received, which is $8,000.

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