If you are an entrepreneur, business owner, or a venture capital investor, and you lend money to a business that fails to pay it back, it may be possible to claim an ordinary loss. But if the loan is made for investment purposes (rather than connected to your employment or business), the loss is generally capital. Capital losses can be carried forward, but can only be used up to offset up to $3,000 per year in ordinary income.
A loss on a loan by an owner to a business may qualify as a business bad debt when the loan is connected to the owner’s employment or other trade or business. Under case law, a loan by a venture capital fund manager to a business associate who provided the fund manager with investment leads also qualified. Jon has considerable experience in this area, such as advising an individual on claiming bad business debt losses arising out of loans to a technology start-up.