Final answer:
Ross can potentially deduct the full $1,000 he loaned to Kay as a nonbusiness bad debt, provided he can substantiate that the debt has become uncollectible after a reasonable investigation.
Step-by-step explanation:
In the scenario described, Ross may be entitled to claim a bad debt deduction if Kay has disappeared and Ross has determined through a reasonable investigation that repayment is not forthcoming. The specific amount Ross can deduct will depend on whether the loan qualifies as a business bad debt or a nonbusiness bad debt and whether he has previously reported the interest income on his tax return. Generally, for nonbusiness bad debts, such as those that arise from personal loans to friends or family, the deduction is limited to the amount of the outstanding principal that has become uncollectible. In this case, assuming the loan was personal and Ross did not receive any repayments, the potential deduction could be the entire $1,000 originally loaned to Kay.
It should be noted that Ross will need to file the appropriate forms and provide evidence to substantiate the bad debt deduction claim on his tax return. This may include documentation of the loan agreement, efforts made to collect the debt, and the determination that the debt is worthless. If a reasonable investigation by Ross indicates that he cannot find Kay or that a suit against Kay would not result in collection, Ross can deduct the entire $1,000 loan as a bad debt expense.