Your client, Chris, has a full-time job but also works occasionally in her friend’s carpet cleaning business. She doesn’t really need the extra work, but she wants to help Chris out when the carpet cleaning business gets busy. Chris loaned $25,000 to her friend to help get the business started. The written agreement provided for annual interest payments at the prevailing market rate and for repayment of principal in installments beginning two years from the date of the note. Chris has received the interest payments but has not received any repayments on the principle. Chris believes her friend will likely file bankruptcy in June of this year. She wants to know if there are any tax implications for her if she can’t recover the loan. Specifically, she wants to know (1) whether or not she can deduct the amount as a business bad debt or, if not, is there another way it can be handled. She also wants to know (2) if she can deduct the entire amount in one year or if it is limited (assuming it is deductible at all).

 

Required: Please research the issue and write an internal research memo with your analysis. Your response should cite at least two primary sources. One of your sources should be a court case AND a copy of the case should accompany your answer