The ability to deduct a loan as a bad debt hinges on whether there was a bona fide debt in place. Forgiving a loan given to a family member or friend can often times be viewed as a gift. Get something in writing that says how and when the debt will be paid off. If the person who borrowed the money fails to pay you back, you will stand a much better chance of being allowed a deduction as a nonbusiness bad debt if you can prove there was a true loan in the first place and that it is now uncollectible [§166 and Reg. §1.166-1(c)].