View Full Version : Guaranteed Business loans on closed business

03-16-2011, 09:04 PM
I had two business loans that i signed a personal guarantee on. The loans were in the name of the company but PG'd by me.

We closed the business last March and sold the equipment that was collateral on the loans. We received enough through the sale to pay off one of the loans, but I had to continue to pay the other out of pocket.

Would this be considered a bad debt and am I allowed to write this off as a loss on my tax return or am I just SOL?

We were an LLC filing as an S Corp.



03-16-2011, 10:51 PM
This isn't a "bad debt", just a bad business investment. Assuming these were loans to the business, in it's name, with you as the PG, especially in an LLC (specifically, taxed as an S-Corp) -- you're in a SOL situation.

Debt in the name of the business does NOT increase your basis in the LLC (taxed as S-Corp) even when you're a PG. Assuming you sold the assets, everything was converted to cash, and you were still short, to some extent you may have a capital loss if you sold your shares of stock/dissolved the corporation (capital losses are limited). The fact that you are personally liable doesn't increase your basis to further expand the loss you can take, and it's not a "bad debt".

If you had the debt forgiven by the financial institution, this amount would have actually been recognized as income to the LLC, and taxable to its members.

Ideally, all of thee members would have been PG's on the LLC's debt... Then again, ideally (for this purpose) you'd be taxed as a disregarded entity so your basis would have increased for these liabilities (and your loss would be larger).

03-17-2011, 09:47 AM
Damn! I was hoping you had better news. :) Oh Well, win some...lose some. Big $$$$ mistake on my part.