How To Deduct An Uncollectible Loan

Have you ever loaned money to a family member or a friend that did not pay you back? Do you want to know how you can deduct it for tax purposes?

Hello, this is Noel Dalmacio, your ultimate CPA at LowerMyTaxNow.
Here are four things you need to do in order to deduct the uncollectible loan:

Put it in writing
Treat the loan as if you are lending it to a third-party. For IRS purposes, a valid loan agreement is important, otherwise, the IRS could argue that there was no loan at all — that the money you gave was really a gift.

Set an IRS-approved interest rate
If you loaned money to a family member and charge no interest, you might have some unfavorable tax issues. The best way is to set a rate that is based on the IRS-approved applicable federal rate (AFR). The IRS rates are published in the Internal Revenue Bulletins and can be found at the IRS website

Keep all correspondence
Make sure you keep all the emails and letters re: the collection follow-up so you can show that you are putting in the effort to get your money back. You would need this as a support when you file your return.

Issue a 1099-COD (Cancellation of Debt)
If you want a bullet-proof tax support, then issue a 1099-COD Cancellation of debt. That way you can deduct the money loaned as uncollectible debt and your borrower needs to report it as income. It will be considered a short-term capital loss for tax purposes.

So those are the 4 things you need to do: put it in writing, set an IRS-approved interest rate keep all correspondence and issue a 1099-COD (Cancellation of Debt) so you can deduct the uncollectible loan.

If you like to learn more, click the link and sign-in to receive my weekly blog.
Until then, this is Noel Dalmacio, your ultimate CPA at

Site Navigation


Noel Dalmacio, CPA, CFP, MS TAX
30 Corporate Park, Suite 102.
Irvine, CA 92606

Follow Us On

© Copyright 2012 Lower My Tax Now. All Rights Reserved