Mary incurred a $20,000 nonbusiness bad debt last year.She also had an $18,000 long-term capital gain last year. Her taxable income for last year was $25,000.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 when they become worthless. If Mary unexpectedly recovers part of the debt, the recovery is reported as income up to the amount deducted in the previous year that reduced her tax. Since she had a long-term capital gain of $18,000 and a nonbusiness bad debt of $20,000, the entire bad debt would have been claimed, reducing her taxable income. The collection of $12,000 is therefore considered income because it's a recovery of an amount previously deducted.

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