Ellen loans Nicole $45,000 to start a hair salon. Unfortunately, the business fails in 2014 and she is unable to pay back Ellen. In 2014, Ellen also had $20,000 of income from her part-time job and $12,000 of capital gain from the sale of stock. How much of the $45,000 bad debt can Ellen claim as a capital loss in 2014?

Question

Ellen loans Nicole $45,000 to start a hair salon. Unfortunately, the business fails in 2014 and she is unable to pay back Ellen. In 2014, Ellen also had $20,000 of income from her part-time job and $12,000 of capital gain from the sale of stock. How much of the $45,000 bad debt can Ellen claim as a capital loss in 2014? ​

Quizplus · Accepted Answer

Ellen can claim the bad debt as a capital loss on her tax return. The amount of the loss would be the original loan amount of $45,000 minus any amount that was recovered (if any) from Nicole. In this case, it doesn't state that any amount was recovered.

So, Ellen can claim a capital loss of $45,000 for the bad debt in 2014. However, she can only use up to $3,000 of capital losses to offset her ordinary income in any given year. The remaining capital loss of $42,000 ($45,000 - $3,000) can be carried forward to future years to offset future capital gains or up to $3,000 of ordinary income in those years.

Therefore, the answer is D: $15,000, with $30,000 carried forward to 2015.

Ellen Loans Nicole $45,000 to Start a Hair Salon