Deduct failure from tax

Empty pockets

Lenders can claim loan defaults in their tax returns.

(Photo: dpa)

Berlin Anyone who makes part of their assets available to others as a loan should check the borrower’s financial strength beforehand. Otherwise, there is a great risk of being surprised by possible payment difficulties. If exactly this happens, however, it is important to reduce the financial damage. It makes sense to claim the loss in the income tax return with the income from capital assets.

A lender who had privately granted an interest-bearing loan in 2010 also wanted to take advantage of this opportunity. However, the debtor stopped repayments as early as August of the following year. In August 2012, insolvency proceedings were finally opened against his assets. The creditor then registered his claim on the bankruptcy table. However, due to a lack of funds, the insolvency proceedings were discontinued four years later, which had already become apparent in October 2012.

The responsible tax office did not recognize the losses claimed in the lender’s income tax return. On the other hand, the creditor initially defended himself unsuccessfully at the Düsseldorf Finance Court. The judges based their decision on the fact that the Income Tax Act does not cover expenses from a loan. However, the Federal Fiscal Court saw it differently in the subsequent revision and referred the case back to the lower instance for further examination (Az. VIII R 28/18). In his estimation, the final failure of a private loan claim after the introduction of the withholding tax will lead to a tax loss.

The task of the Düsseldorf Finance Court was ultimately to find out the amount of the loss and whether this had actually happened in 2012. After the judges also answered in the affirmative, they upheld the complaint. This now prompted the responsible tax office to revise before the Federal Fiscal Court, where the authority failed, however.

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When losses reduce income tax

In order for private lenders to be able to claim a loss in their income tax return, one basic requirement must be met: the loss of this claim must be definitively established. This is usually the case after the bankruptcy proceedings are closed. According to the decision of the Federal Fiscal Court, creditors do not have to wait that long if there are objective indications that repayment can no longer be expected. In these circumstances, you can tax losses from the date of this determination.

A sign of the final bad debt loss can be seen if the opening of insolvency proceedings is rejected due to lack of assets. Because that means that the bankruptcy estate is not enough to serve all creditors. If this changes before the suspension of the insolvency proceedings, a so-called retrospective event occurs. As a result, an amount received later from the bankruptcy estate would have to be retrospectively taken into account in the assessment year in which the loss was asserted.

In addition to the time aspect, the borrower has to meet three other requirements if he wants to claim his loss for tax purposes. So he must have paid the loan amount in full to the debtor. Because only then is he entitled to a contractual right to repayment. In addition, the intention to generate income is assumed. The same applies to the fact that the creditor did not have to expect default when the loan was paid out.

Practical tip: What to consider with a private loan

In principle, lenders should draw up a contract in which the amount paid out, the term of the loan as well as the interest and repayment terms are set out. Such an approach is not only used to avoid ambiguities and arguments that would strain the relationship. Rather, the contract can also be important as evidence to authorities. After all, interest from such credit transactions is taxable in the income tax return as “income from capital assets”.

Creditors should definitely resist the temptation to hide the interest income from the tax office. If the debtor includes the interest paid in his tax return as income-related expenses, the authorities will be aware of the income of the financier anyway. A tax audit can be expected if the interest income has not been declared. This is all the more true, of course, if amounts have been invested via loan portals such as Auxmoney, Smava, Mintos or Viainvest loans. Because they are also among the privately granted loans.

Is this tax tip interesting for you? You can find more articles at our cooperation partner Haufe.de.

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