Question

Mary incurred a $20,000 nonbusiness bad debt last year. She also had an $18,000 long-term capital gain last year. Her taxable income for last year was $25,000. During the current year, she unexpectedly collected $12,000 on the debt. How should Mary account for the collection

Answer 1

Answer: $12000 income.

Step-by-step explanation:

It should be noted that non business bad debts are regarded as short term capital loss. In the question given, the $18000 long-term capital gain will have to be offset against the bad debt of $20000.

In this case, the tax benefit will be $18000, therefore $12000 will be recognized as the income.