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Worthless Debt Deduction – A Cautionary Tale

By:  Amanda Wilson

For partnership, individuals and other types of taxpayers that are not in the business of making loans, the main avenue for tax relief when a loan goes bad is Section 166 – the bad debt deduction.  In order to claim this deduction, the taxpayer must show that the debt has become wholly worthless during the tax year in which the deduction is claimed.  This can often be a very difficult burden for taxpayers, especially if there is no external event that they can identify as a trigger for worthlessness.  Even if there is such an event (such as the borrower declaring bankruptcy), worthlessness can be difficult to establish. read more

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Abandon All Hope? If a Partnership, Maybe

By:  Amanda Wilson

Several years ago, many taxpayers faced with underwater partnerships would abandon their partnership interests, thereby triggering an ordinary loss.  This ordinary loss was often preferred over the capital loss that would be triggered if the taxpayer’s sold their partnership interests or liquidated the partnership.  Capital losses are less advantageous, as they can generally only be used to offset capital gains.  By contrast, ordinary losses can offset ordinary income, providing a much bigger tax benefit. read more