Several years ago Amy Westbrook, who is in the lending business, loaned Sara Stuart $30,000 to purchase an automobile to be used for personal purposes. In August of the current year, Sara filed for bankruptcy, after paying back $1,000 of the loan to Amy. Amy was notified by the bankruptcy court that she could not expect to receive more than an additional $4,000. Amy has contacted you about the possibility of taking a bad debt deduction for the current year.

Required:
Write the letter to Amy that contains your advice as to whether she can claim a bad debt deduction for the current year.

Question

09-03-2022
Business

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Several years ago Amy Westbrook, who is in the lending business, loaned Sara Stuart $30,000 to purchase an automobile to be used for personal purposes. In August of the current year, Sara filed for bankruptcy, after paying back $1,000 of the loan to Amy. Amy was notified by the bankruptcy court that she could not expect to receive more than an additional $4,000. Amy has contacted you about the possibility of taking a bad debt deduction for the current year.

Required:
Write the letter to Amy that contains your advice as to whether she can claim a bad debt deduction for the current year.

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Parrain Parrain · Answer 1 · 2022-03-15T14:43:55+01:00

In a letter written to Amy to advice her on whether she can claim a bad debt deduction, the best advice is that she can indeed take the bad debt deduction in the current year.

When can a bad debt deduction be claimed?

IRS rules state that a business cannot claim a deduction for a bad debt if the debt has deemed to be totally worthless which means that the rest of the amount cannot be collected.

The bankruptcy court here has told Amy that she cannot receive more than another $4,000 which means the rest of the debt is worthless.

Amy can and should therefore claim the bad debt as a deduction for tax purposes.

Find out more on bad debt tax deductions at https://brainly.com/question/2065258.