In 2016, Gerald loaned Main Street Bakery $55,000. In 2017, he learned that he would probably receive only $6,400 of the loan. In 2018, Gerald received $3,000 in final settlement of the loan. Calculate Gerald’s possible deductions with respect to the loan for 2016, 2017, and 2018.

in 2016 and 2017 No deduction

In 2018, deduction allowed = $52000

Explanation:

Possible deductions is only allowed on non business debt which has become wholly bad in the year it becomes bad

Loan given By Gerald is a non business debt. He learnt that he would probably receive only $6,400 in 2017 but received received  final settlement of $3,000 in 2018. Therefore, no deduction will be allowed in 2016 and 2017 as non business debt has not become entirely worthless because it seems that there may still be some collections in future.

In 2018, he received final settlement of $3,000 rendering the remaining a bad debt

Deduction = Total loan given - amount received in final settlement

Deduction = $55,000 - $3,000

= $52000

So deduction of $52000 will be allowed as $52000 has become wholly worthless it will be taken as short term capital loss

There will be no deduction between the year 2016 to 2017

There will be an ordinary deduction of $52,000

Explanation:

Based on the scenario being discussed in the question, If they exist good business relationship between Gerald and the Street Bakery, then Gerald is allowed an ordinary deduction of $52,000 in 2018. A non-business bad debt is treated as a short-term capital loss. Which means, He would have no deduction in 2016 or 2017 because the debt was gainful and there was some hope of collecting his debt.