Tax Implications

[Guest]

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[Bus]

Our community investment committee is considering "investing" a portion of our charitable allocation to Kiva. So, our CFO is starting to investigate tax implications of this.

Does anyone have any knowledge in this area?

There are no capital gains or investment income, but there is a potential for capital loss. Does Kiva put out year-end tax reports?

We are clear on the rules for donations to support Kiva operations since that is typical, but not clear about the loan portion.

[chris]

Lending to Kiva borrowers is akin to loaning money to a friend; you anticipate getting the exact amount back, but understand that a partial paypack is a possible risk.  Because it's a friendly personal loan, you don't obtain shares or any type of property, so I don't think that losing money through Kiva would constitute a capital loss.  You didn't sell any property for less than you bought it for, although you did lose money.  In effect, I don't think that Kiva loans are investments in the truest sense.

Two things to note however:

• donations to Kiva (the organization) are tax-deductible, as it is a registered non-profit
• the percentage of losses incurred from bad loans are likely to be in the low single digits, especially if your investment club holds a large portfolio

[KEDS]

The following is FAQ # 25 on the Kiva web page (emphasis added):

25.  If my loan defaults, can I then claim it as a tax-deductible donation?

No, because it was intended as a loan, not a donation.  However you can claim it as a capital loss.

[chris]

I had a look.  While bad loans aren't capital losses in the investment sense, they can still be reported on Schedule D (here in the US).

Have a read: http://www.irs.gov/publications/p550/ch04.html#d0e12258

Two things to note:

• The debt must be completely worthless
• The deduction can only be taken in the tax year when the debt is deemed worthless

That first bullet is not true for businesses.  So Bus, if your investment club operated as a business entity, then it could expense out partially repaid loans as an allowance for doubtful accounts.  I'd have your CFO go over IRS publication 550.

[AccountAbility]

Actually, it isn't about whether you are a business or not, but whether you report on an accrual or cash basis.  Businesses who are reporting on a cash basis must wait until the year that the loan or investment is deemed completely worthless.  This is something Kiva should be reporting in those rare instances where the loan becomes permanently lost.