Just before the end of 2017, I had a consultation with a new client. As we sorted through the various issues, I spotted that they had possibly lost a little under $200,000 in an investment. Based on the initial notes, the investor had criminal charges pending against him. The money, as far as anyone could tell was gone.
In any other year, I might have waited until 2018 to see how the case developed, but this year, we needed to move quickly to move it into 2017. There would be a big write-off in 2017 and none in 2018.
The issue is “timing.” When can the loss be taken? It’s not whether there is a loss. That’s pretty certain. The question is when is it a legally deductible loss?
The Tax Court has dealt with several cases regarding this. You must have reasonable certainty you won’t recoup your money. You aren’t required to have “incorrigible optimism.” If there is only a remote chance that you will recover, you probably have a write-off.
Additionally, you need to be able to show you have credible evidence. You have to show that you really had a loss and demonstrate what that financial amount will be.
The best solution, the one we’ll be using, is to include a statement by an independent third party as to the amount of the loss and the slim chance of any amount of recovery. That will be attached to the taxpayer’s tax return to provide proof.
If later there is recovery, that amount will need to be added to the personal income for that year.
This case won’t be applicable for everyone, but for those it fits, it can be very valuable.
If you have some deductions you’re about to lose, give us a call! Whether you join our coaching program or have a private consultation, we can help you make smart, strategic decisions on your 2017 return. Contact Us.