Question

Blue Corporation (a seller of goods to Cedar Corporation) has made loans to Cedar Corporation, which become worthless in the current year.
A. The loans provide Blue Corporation with a business bad debt deduction.
B. Blue Corporation cannot claim a deduction for the worthless loans.
C. The loans provide a non-business bad debt deduction to Blue Corporation.
D. None of the above.

Answer 1

Answer:

A. The loan provide Blue Corporation with a business bad debt deduction.

Explanation:

A tax payer can make claim for the deduction and write off of a business debt in as much the debt has a link with his trade , there exist a creditor/debtor relationship and the debt becomes worthless in the year that the deduction was claimed. Moreover, it must be ascertained that the tax payer or creditor is in the business of lending money before the bad debt deduction can be allowed, the loan must also be a bonafide debt and the tax payer must prove that the debt becomes worthless in the current year of deduction.

It is to be noted however that a loan can become worthless for a number of reasons as determined by the Tax court ; fall in debtor's business or value of the debtor's assets, serious financial hardships encountered by the debtor, his earning capacity, his refusal to pay the debt, business climate etc