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President advances funds to a charity over a number of

President advances funds to...

President advances funds to a charity over a number of years. Always figuring it would get paid back. Charity ends up going out of business. Can the cash basis taxpayer take a charity deduction in the year the advances went out the door???

Accountant's Assistant: The Accountant will know how to help. Is there anything else the Accountant should be aware of?

Nope, pretty simple issue

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Answered in 5 minutes by:
3/24/2018
Lev
Lev, Tax Advisor
Category: Tax
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You stated - Always figuring it would get paid back.

That makes me think - that was not a charitable contribution - but rather a loan?

Is that correct ?

If the original intention was to make contribution and

if that is a qualified charitable organization

Then - we may deduct these contribution in years where they were made.

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Customer reply replied 26 days ago
Correct, but if you loan to a charitable organization and it does not get paid back, can we deduct the total loans as contributions in the year the organization goes defunct?

We need to be clear - if that was a bona fide loan - and there were expectations to be paid back - that may not be classified as charitable contribution.

However - when it became obvious that the loan will not be paid back - we have a situation with a "bad debt"
The bad debt may be deducted. But deduction rules are different.

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Customer reply replied 26 days ago
What about?Forgiving a Loan
• Suppose a board member of a charitable organization loans money to the organization, and the organization defaults on the loan. Rather than enforcing his rights under the terms of the loan agreement, the board member might decide to forgive the loan. When he forgives the loan, he must sign the appropriate documents that release the organization from its obligation to pay back the loan, He must also waive his right to claim collateral used to secure the loan or to collect from a loan guarantor.
Charitable Contribution
• Provided there is sufficient evidence that a charitable organization fully intended to repay a loan, an individual or foundation can forgive a loan if the organization risks defaulting on the loan. Commercial lenders, credit unions and community development financial institutions are not permitted to convert a loan to a charitable contribution. The remaining principal balance of the loan becomes a tax-deductible charitable contribution to the individual or foundation lender. Unpaid Interest on the loan is typically not eligible to be included as part of the tax deduction.

We are talking about CONVERSION of the loan to charitable contribution.

That is questionable transaction.

While there is no any direct references that prohibits or allows such conversion - we look as that as a gray area.

You may try that approach - and attach a note to your tax return with explanation of facts and your position regarding the issue.

However I would not test the IRS reaction - and simply would deduct that as a bad debt which is perfectly allowed.

Lev
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Customer reply replied 26 days ago
Thank you - good idea, not sure which way I will go.
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