The Central Bank (CBK) recently published a list of companies that may offer loans through apps (LIST HERE). As of this post-publication, you can find the list here. In today’s digital era, loan apps have revolutionised how individuals and businesses access funds.
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The apps offer a seamless and swift way to get loans, bypassing the cumbersome procedures associated with traditional banking. However, this convenience raises a critical question that many borrowers often ponder Are loans from loan apps considered taxable income? This article delves into this question, offering clarity and insight into the tax implications of using loan apps.
There is always that question “Are loans from loan apps considered taxable income?”
Understanding Loans
To address this question, one must first understand what a loan entails. A loan involves borrowing money, which the borrower must repay, usually with interest. Borrowing money through loans does not increase borrowers’ net wealth because it is not considered an earned income. Under typical circumstances, loans are not classified as income or subject to income tax.
Taxable Income
Taxable income encompasses all earnings that contribute to increased net wealth. This includes wages, salaries, bonuses, interest from investments, rental income, and more. Learn about taxable income here.
Since a loan represents borrowed money that needs to be repaid, it does not qualify as taxable income. However, the tax landscape can be intricate, and specific scenarios might alter this general rule.
Loan Forgiveness
One notable exception to the rule that loans are not taxable income is loan forgiveness. When a lender forgives a loan, it no longer requires the borrower to repay the debt, increasing the borrower’s net wealth. For tax, the tax commissioner may consider the forgiven amount as taxable income.
This principle is because the borrower benefits financially from releasing the obligation to repay the loan. Therefore, if a loan app grants you a loan and later forgives it, you may need to pay taxes on the forgiven amount.
Interest Deductions
Another critical aspect to consider is the tax treatment of loan interest. While the interest paid on personal loans from loan apps is not tax deductible unless the person reports income from other sources besides employment income or income whose withheld tax is final, e.g., capital gains tax (CGT), there are exceptions.
For instance, individuals can often deduct interest on student loans and mortgages if they meet certain conditions. However, the interest does not qualify for a deduction for most personal loans obtained through loan apps.
Business Loans
The tax treatment of loans can also vary depending on their purpose. If you use a loan for business, the interest and fees associated with the loan might be deductible as business expenses. If any amount of the loan is not used to generate income in the business, then that amount will not be tax deductible.
The tax deductibility of loan interest and fees will provide tax benefits for small and medium business owners and entrepreneurs who rely on loan apps for business funding. Accurate documents and records are crucial evidence for any tax deductions.
Record-Keeping for Tax Filing
Thorough record-keeping is paramount when dealing with loans from loan apps. Proper documentation can help clarify your financial situation and support your tax filings. Here are some essential records and documents to have in place
Loan Agreement
Keep a copy of the loan agreement, which outlines the terms and conditions of any loan. This should include all the repayment schedules, interest rates, and interest paid.
Repayment Records
Keep detailed records of all payments made towards repaying the loan. This includes dates, amounts, and any correspondence with the loan provider.
Communication
Document any communications with the loan app provided, especially those related to changes in loan terms, repayment plans, or loan forgiveness.
Navigating Complex Scenarios
The landscape of tax rules, regulations, and laws is complex and ever-developing. To ensure compliance and optimise your financial strategy, consider the following steps
Consult a Tax Professional
Given the complexities of tax rules, regulations, and laws, it is advisable to consult a tax professional, such as consultants or advisors or any financial advisor. The tax professionals will provide personalised technical advice that is based on your unique financial situation. They will also help you navigate the intricacies of tax rules, regulations, and laws.
Stay informed
The tax industry is dynamic, and there are many updates. Tax rules, regulations, and laws have changed many times, and these changes may affect how loans and other financial transactions are treated. Therefore, staying informed about changes or updates on tax rules, regulations, and laws that might affect your situation is essential.
Conclusion
In conclusion, while individuals do not consider loans from loan apps taxable income, they should know about exceptions. Loan forgiveness can result in taxable income, and interest deductibility depends on the loan’s purpose.
Maintaining records and seeking professional advice will help you navigate these tax complexities and ensure improved compliance with tax rules, regulations, and laws. By staying up to date and taking initiative, you can make well-informed financial decisions and prevent unexpected tax obligations.
Call to Action
Managing your finances in the digital age requires vigilance and a keen understanding of the tax implications of your actions. If you have questions about how your loans from loan apps might affect your taxes, contact a tax advisor who will provide expert guidance to navigate the tax regulations landscape, ensuring you make the most of your financial opportunities while remaining compliant with the law.
Thank you for reading the post. Let us know your thoughts in the comments.
Dr Wakaguyu
taxkenya@gmail.com
