This year's ProSeries Form 1040 includes, under Schedule D, "Bad debt". Unfortunately, the form is not constructed to include cases where the taxpayer is paying off a loan guarantee, which is classified as a Bad debt. The need to fill in dates, rather than have the ability to simply click on "S" for "Short-term capital loss" is an oversight. When I contacted ProSeries I was told that ProSeries are not tax professionals, a poor excuse for something they should correct.
Deductible loan guarantees are rare animals. You actually have a client who qualifies?
Loan guarantees. If you guarantee a debt that
becomes worthless, you cannot take a bad debt
deduction for your payments on the debt unless
you can show either that your reason for making
the guarantee was to protect your investment or
that you entered the guarantee transaction with
a profit motive. If you make the guarantee as a
favor to friends and do not receive any consideration
in return, your payments are considered
a gift and you cannot take a deduction.
Are you checking Box C on the Form 8949? Maybe ProSeries wants you first to complete the required statement:
For each bad debt, attach a statement to
your return that contains:
• A description of the debt, including the
amount, and the date it became due;
• The name of the debtor, and any business
or family relationship between you and the
• The efforts you made to collect the debt;
• Why you decided the debt was worthless.
For example, you could show that the borrower
has declared bankruptcy, or that legal action
to collect would probably not result in payment
of any part of the debt.
Taxpayer was the sole shareholder and officer of a corporation. In order for the company to get an American Express card, the T/P had to guarantee payment of any debt incurred on this account. When the company went out of business, with no assets, the T/P agreed to pay the balance owed to American Express over a period time and I have deducted those payments each year as a non-business bad debt short-term capital loss. The ProSeries form seems to preclude situations that did not result from the T/P lending funds that were not repaid.
Was the card used for business expenses? Were they deducted by the corporation when incurred? Or was it used for personal expenses?
I'm not sure I would have filed a final 1120-S when there were still outstanding expenses, if they had not been deducted already. They look more like Schedule K-1 items that would pass through as the shareholder contributed capital. Then you wouldn't be stuck with a $3K annual limit.