Several years ago John Johnson, who is in the lending business, loaned Sara $30,000 to purchase an automobile to be used for personal purposes. In August of the current year, Sara filed for bankruptcy, and John was notified that he could not expect to receive more than $4,000. As of the end of the current year, John has received $1,000 of the expected $4,000. John has contacted you about the possibility of taking a bad debt deduction for the current year. Complete the letter to John that contains your advice as to whether he can claim a bad debt deduction for the current year. Maloney, Raabe, Hoffman, & Young, CPAs 5191 Natorp Boulevard Mason, OH 45040 January 29, 2019 Mr. John Johnson 100 Tyler Lane Erie, PA 16563 Dear Mr. Johnson: This letter is to inform you of the possibility of taking a bad debt deduction. Your loan to Sara is a business bad debt; therefore, you are allowed to take a bad debt deduction for partial worthlessness. You will be able to take a bad debt deduction in the current year of $ 25,000 . Should you need more information or need to clarify anything, please contact me. Sincerely, John J. Jones, CPA Partner Feedback In determining the amount and timing of the deduction for bad debts, proper classification is again important. Complete the memo for the tax files. TAX FILE MEMORANDUM DATE: January 29, 2019 FROM: John J. Jones SUBJECT: Bad Debt Deduction John Johnson's $30,000 loan to Sara is a business bad debt. Therefore, his bad debt deduction for the current year of $ 25,000 . John will be able to claim an additional bad debt deduction in the year when final settlement is reached if the amount is less than the remaining $3,000.