Loan Guarantee Excised where to report?

[equinecpa]

I have a client who had a business and guaranteed some loans to that business. Ownership of the business has since changed hands. Unfortunately someone did not do some paperwork and some loans that he personally guaranteed to that business were not paid so the bank nabbed approximately $50,000 from his personal accounts.

He has been receiving equipment leasing income from this venture (it's some kind of technology lease) that has been reported on schedule E for the last few years. Last year he didn't receive any income from the venture. And paid out the 50,000.

What kind of deduction is the $50,000 -would it be a capital loss? Do you think it could be taken as a schedule E deduction since it's associated with that stream of income?

[veritas]

Sch E?

I don't think the income should have been reported on a Sch E. Sounds to me like a business loss. However what type of entity was the business operated under?

By Sch E did you mean pg 2?

[equinecpa]

This is tough for me as I don't know all the details from the past (client was new to me in 2007 -the original transaction here occurred many years ago.). What I understand: My client had a company that developed a technology. They sold the rights to use that technology as well as the business that developed the technology. Prior accountant has reported approx $50K in royalty income each subsequent year (this is ongoing receipts, for which my client also receives a 1099-misc each year).

So my understanding is that the purchaser of my clients business and payer of the royalties, also assumed a loan that had formerly been in my clients name. Unfortunately my clients name was left on the bank note as guarantor of that loan, and when the purchaser defaulted last year- my client was left holding the bag, and the bank deducted the defaulted payments directly from his personal account.

The payer also defaulted on the royalty payments this year. My client is suing them to recover the lost royalties and the loan guarantee payment. He does expect to recover this money.

My dilemma is where to claim these expenses on the return: I am seeing it as a cost of earning the royalty income and therefore am thinking to deduct it on schedule E. This year it really doesn't make a difference where it is claimed as my client doesn't have taxable income -it will affect only his loss carryforwards whether they are capital or NOL's in nature.

Is my argument that the loan guarantee payments excised were a business bad debt related to the royalties sufficient to take a schedule E deduction?

[veritas]

Royalties on Sch E

Ok that makes sense. My inclination would be to put the loss on 4797.