When do I use Sch D or form 4684/Sch A?

[Pacun]

73. Thomas loaned friend Susan $10,000 for a down payment on a home. Thomas and Susan signed a note in which Susan agreed to pay $100 a month with an interest rate of 4% until the loan was completely paid. Susan lost both her job and her home in 2003. Susan filed bankruptcy and went to live with her mother. Thomas sued Susan in court for non-payment in August 2004,but the court dissolved her debt to Thomas based upon the bankruptcy. When Susan defaulted, the outstanding balance due on the note was $7,000. If Thomas had only wage income reportable during the year, how much would his deductible bad debt be in 2004?

A. $7,000

B. $6,900

C. $3,000

D. $10,000

This was a question on the enrolled agent exam in 2005. The IRS accepted answers are A or C, which means that you can use either Sch D or form 4684 with schedule A (provided you have other items to itemized). Is there a rule when to use Schedule D or form 4684 for similar situations? Is the income producing property the determinant factor?

[Don in Upstate NY]

... <Personal bad debt of $7,000> ... how much would his deductible bad debt be in 2004?

A. $7,000

B. $6,900

C. $3,000

D. $10,000

The IRS accepted answers are A or C, which means that you can use either Sch D or form 4684 with schedule A (provided you have other items to itemized).

I disagree with your conclusion. If form 4684 were allowed, the deductible bad debt would be a maximum of $6,900 (answer B ) which is the $7,000 reduced by the $100 minimum on form 4684.

[Pacun]

I disagree with your conclusion. If form 4684 were allowed, the deductible bad debt would be a maximum of $6,900 (answer B ) which is the $7,000 reduced by the $100 minimum on form 4684.

Choice B was my original answer and it was wrong. There is no $100 (now is $500) minimum for bad dedt and income producing property on form 4684. Everything transfers to sch A.