Say I loan $5,000.00 to a relative, and they still owe the majority of that amount after many years of no payment. Can I just vaguely write off this number, assuming the money was lent as cash, hand-to-hand? Or electronic transfers, such as bank withdrawals? Can I claim this (non-employee)?

I file business taxes (Schedule C Profit/Loss). Can I add this as a deduction on there?

I cannot prove what the money was lent for nor the amount since it's just personal bank transactions or out-of-pocket loans. I want to know how reasonable this is also and how the IRS would know if one is lying or not in such predicaments (especially with personal matters).

  • from what you have said the assumption would be the US but it would be nice if you added a country tag when asking these questions, the laws vary greatly depending on your jurisdiction – GµårÐïåñ Sep 24 '17 at 20:19
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    sounds like a gift to me! – Victor Sep 24 '17 at 21:48

You will have to write it off as an offset of capital gains or as bad debt against personal income, limited to $3k/ yr. Write off 3k this year, 2k next. Here's the tax code, you'll need to file a form 8949, link below. https://www.irs.gov/taxtopics/tc450/tc453

So, this requires that it is a loan, acknowledged by both you and the borrower, with terms of repayment and stated interest, as well as wording for late payments and time for delinquency. The loan document doesn't have to be fancy, but it must show a reasonable intention of repayment to distinguish it from a gift. Then send out a 1099c for cancellation of debt.

This is a starting point, it's a good idea to run everything by your tax processional to make sure you're meeting the requirements for bad debt with your contact and payment communication.

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