Just as art imitates life, the financial world mirrors the population’s habits. In addition, this logical trajectory includes the Internal Revenue Service – no matter what Americans get up to, the IRS will create a procedure to govern and legitimize it. It’s interesting to note that these bastions of financial civility engage in practices that, when performed by an individual, seem a little distasteful and maybe even desperate. It just goes to show that presentation is truly everything.
Take, for example, a gentleman who has a love for the ponies. When he gets a hot tip, he marches to the pawn shop, sells one of his few valuable possessions, goes to the track and lays his money down. If all goes well, he returns the next day and (for a small free) retrieves his property. While pawn shops are legal, the activity itself is predatory and vaguely unwholesome. In addition, selling memories out of desperation is depressing. When one uses the word “pawn shop,” there is an element of the shady clearly implied.
However, when a financial institution uses the term “repurchase agreement,” hardly anyone pictures a dusty, dim market of broken dreams. This is odd, as there is no difference between the two concepts. A repurchase agreement is a way to raise short-term cash by selling government securities to another party and buying them back, usually the next day, at a higher price (Investopedia.com). Sound familiar? While pawn shops see brisk business, their more affluent sibling, the repo market, enjoys $2 trillion to $4 trillion worth of trades each day (Brookings.edu) – pawn is popular, no matter what color the collar is.
Also similar to pawn shops, the buyer is protected if the seller can’t come up with the money to actually get the stuff back; the securities act as both the product being sold and the collateral for the loan (Investopedia.com). The buyer agrees to sell back according to the contract payment schedule, but before that, she/he is the legal owner. If the seller ends up going bankrupt, the buyer isn’t required to wait for the courts to make decisions before reselling the securities (Investopedia.com).
Pawning things out of necessity is bad, but not listening to your mom is worse. We were taught that, if you lend money to a relative, you may as well consider it a gift when you hand it over. If that lesson didn’t stick, the IRS is here to reiterate it. Say you lent your sister a boatload of money. She promised to pay you, you spit on your palms and shook. But. She didn’t pay you and now you wonder if you can deduct that amount on your return. No, no you can’t. Because you had a sneaking suspicion that you’d never see that money again, the IRS says that you have to consider it a gift and you’re not allowed to deduct it as a bad debt (IRS.gov). However, if you do things the right way, you might be able to deduct a “maximum of $3,000 per year in bad loans against ordinary income” (Creditcards.com). While a family member might be wounded when you pull out the promissory note, payment schedule, collateral description and interest rate (Marketwatch.com), these will allow you to deduct. Basically, the IRS needs proof that you never intended your loan to be a gift. Bury them in paper and deduct away!
Presentation is what it’s all about; with enough big words and legal-sized paper, the most questionable undertakings can attain an aura of legitimacy. If Fortune 500 companies can make “pawn” sound good, just think what you can do!
No matter how much you pretty it up, Bourke Accounting doesn’t want you to pawn your stuff. If you make another loan to your sister, your Bourke Accounting rep will be happy to notarize the terms for you. Bourke Accounting’s priority is helping you to keep as much as you can. You can’t take it with you, but Bourke wants to make sure you enjoy while you’re here.
Written by Sue H.