I recently loaned some money to my employer and I haven't been repaid. Am I allowed to deduct this expense as a bad debt loss against ordinary income?

ANSWER

The BIDaWIZ Team's Answer:

Generally, losses from bad debts that arise in the course of the taxpayer's business are treated as ordinary losses. In general, ordinary losses are fully deductible without any limitations. However, when the taxpayer makes a loan to his or her employer that results in a business bad debt loss (because the taxpayer is an employee of the company), the IRS says the write-off should be treated as an unreimbursed employee business expense. That means the write-off is subject to the 2% of AGI threshold (when combined with certain other miscellaneous itemized deductions). Unfortunately, the courts have supported the IRS position. Please reference Kenneth Graves, T.C. Memo 2004-140 upheld by the 9th Circuit in 2007 & IRS Publication 529.