I lent money to my best friend 3 years ago when she started a business. Now her business has folded and she can’t pay me back. Can I take a deduction for this?

I lent money to my best friend 3 years ago when she started a business. Now her business has folded and she can't pay me back. Can I take a deduction for this?

Maybe, if you can show you have a worthless nonbusiness bad debt. First, you need to show that the transaction was a loan and not a gift to your friend. This is done by having a promissory note stating the terms of the loan (something, hopefully, you got when you gave her the money). Second, you need to show that the debt has become fully worthless and that there is no possibility of a recovery. The fact that her business went under may not be enough if you made the loan to her personally and not to a business entity (such as a corporation). This may be difficult to prove unless you've used collection practices (e.g., sent collection letters and pursued legal action). If, however, you can prove you have a worthless nonbusiness bad debt, then you can deduct the unpaid principal of the loan as a short-term capital loss (report it on Schedule D of Form 1040).