Five years ago, Tom loaned his son John $20,000 to start a business. A note was executed with an interest rate of 8%, which is the Federal rate. The note required monthly payments of the interest with the $20,000 due at the end of 10 years. John always made the interest payments until last year. During the current year, John notified his father that he was bankrupt and would not be able to repay the $20,000 or the accrued interest of $1,800. Tom is an accrual basis taxpayer whose only income is salary and interest income. The proper treatment for the nonpayment of the note is:

b. $3,000 deduction.

Explanation:

Given that

Loaned amount for starting the business = $20,000

Interest rate = 8%

Time period = 10 years

Accrued interest = $1,800

Based on the above information, the proper treatment for the non payment of the note is $3,000 deduction because the full loan amount is considered as  a short term capital loss due to which only $3,000 is deducted. If there is any amount which exceed than $3,000 the same is to be carried forward to the next year and the $1,800 is not considered for the same.

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