|   Dear
Tax Talk,
I was a partner in a business. A few years later, I sold my partnership
shares to another person who paid me some money upfront and intended
to pay me the rest in installments. He made a few payments, but
then stopped because the business was not doing well.
He still owes me money, and I do not think he will
pay me because the business is at the brink of bankruptcy. I want
to know if I can claim the unpaid money as business or non-business
debt. Thank you.
-- Nelson
 Dear
Nelson,
The answer depends on how you reported the
payments you received. When you sold your partnership interest in exchange for
a down payment and future payments, you entered into an installment sale for tax
purposes. The cost of your partnership interest should have been the amount of
capital you had remaining in the partnership at the time of the sale.
For purposes of illustration, let's assume the capital
was $10,000 and you sold for $100,000. This means you have a 90-percent
gross margin on the principal payments. ($100,000 selling price
less the $10,000 cost gives you an expected $90,000 profit.) If
the buying partner gave you $20,000 down, you should have paid tax
on $18,000, the amount that is 90 percent of your principal payments.
The balance of $2,000 is a recovery of your cost. If you never received
another payment, you would have $8,000 in unrecovered cost, which
would be your write-off in the year that debt becomes unenforceable.
If you didn't report the sale as an
installment sale, then maybe you didn't do things right from the start. Your deduction
should be the amount that you paid tax on minus the amount you didn't receive.
To continue the illustration, if you paid tax on the
full $90,000 (I hope you took your $10,000 cost into consideration)
then your loss would be the amount you were not paid. If you only
paid tax on the amounts you received and backed out your full cost
from the original payment(s), then you wouldn't have a loss on the
remainder since it would have been income if received. Without all
the information, it's hard to give you a definite answer, so maybe
it's best to review the matter with an accountant to make sure you
get your full tax benefit.
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