bad business debt for US personal 1040, self-employed

[g12tx]

I am a US and Canadian citizen living in Texas. I co-founded a company in Canada a few years ago. In 2010, I made a loan to that company. It was an actual cash transfer to the company from my personal funds. The loan is a fully documented contract that states that the principal will be payable in full with accumulated interest at a demand date in 2015, when I will have the option to convert the loan into company shares or simply receive the principal and interest. No loan payments or interest are due until the demand dates in 2015.

Since the company was founded, I have been paid consulting fees by the Canadian company for services rendered while in Texas. I have been reporting this income on my US 1040 return via Schedule C as a sole proprietor and paying self-employment taxes as required.

I want to declare this loan as a bad business debt and deduct it from my 2012 sole proprietorship business income. My business income in 2012 consisted entirely of consulting fees from that Canadian company. The company ran out of cash in October 2012 and stopped paying its Canadian employees and stopped incurring consulting expenses. It was obvious in November that the debt will never be repaid to me and in fact I expect the company to fold in 2013. I understand that if I claim it as a bad debt and it is eventually repaid then I will have to declare the repayments as income.

My question is whether this debt qualifies as a bad business debt as described in IRS Publication 535. If so, should I report it under "Other Expenses" in Part V of Schedule C? Other than the contract documents, do I need any other documentation to justify my claim in case of audit?