Q. I guaranteed a loan my cousin took out for his business. Now I have to pay up because he is defaulting. Is this payment deductible? B.A.W., Brooklyn, N.Y.
A. It depends. When you guarantee a loan and pay it off after the principal debtor defaults, the payment is deductible as a bad business debt only if you had a valid business reason for the guarantee (e.g., to protect a business relationship).
If you guaranteed the loan for investment reasons, it may be deducted as a nonbusiness bad debt. In that case, it is claimed as a capital loss that may offset capital gains plus up to $3,000 of ordinary income.
Tip: Conversely, if you guarantee a loan to a relative or friend merely as a favor, the IRS presumes it is a gift. Therefore, you get no deduction for your payment.
Like what you've read? ...Republish it and share great business tips!
Attention: Readers, Publishers, Editors, Bloggers, Media, Webmasters and more...
We believe great content should be read and passed around. After all, knowledge IS power. And good business can become great with the right information at their fingertips. If you'd like to share any of the insightful articles on BusinessManagementDaily.com, you may republish or syndicate it without charge.
The only thing we ask is that you keep the article exactly as it was written and formatted. You also need to include an attribution statement and link to the article.
" This information is proudly provided by Business Management Daily.com: http://www.businessmanagementdaily.com/20779/tax-fallout-for-a-loan-guarantor "