What are the exceptions to the rule that no deduction is allowed for bad debts which are primarily personal in nature?
Understand the Problem
The question is asking for the exceptions to the rule that no deduction is allowed for bad debts of a personal nature. It presents multiple-choice answers to identify any valid exceptions.
Answer
Non-business bad debts can be deducted if they become entirely worthless within the taxable year.
While deductions are generally not allowed for personal bad debts, the IRS permits an exception for non-business bad debts if they become entirely worthless within the taxable year. Additionally, to qualify as a deductible non-business bad debt, the debtor-creditor relationship must be clear, and you must demonstrate an intent to create a debt with a definite obligation to repay.
Answer for screen readers
While deductions are generally not allowed for personal bad debts, the IRS permits an exception for non-business bad debts if they become entirely worthless within the taxable year. Additionally, to qualify as a deductible non-business bad debt, the debtor-creditor relationship must be clear, and you must demonstrate an intent to create a debt with a definite obligation to repay.
More Information
Non-business bad debts are often personal loans to friends or family members. To deduct them, you need evidence of a genuine debtor-creditor relationship.
Tips
Misclassifying personal loans as business debts can lead to incorrect tax filings. Ensure you have documentation proving the debt relationship.
Sources
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