That is, credit is being extended to people who will not pay it back, resulting in (at the moment presumably x% hypothetical) losses for the bank.
If later on it turns out those loans really are repaid, do I then owe back taxes because I didn't actually lose money?
This is really interesting, I wonder why loan-loss provisions are treated like this. Maybe to discourage making bad loans on purpose to juice earnings or something.
Accrual of Reserves for Estimated Expenses
Although reserves for contingent liabilities are often set up in business practice, amounts credited to reserves are generally not deductible for income tax purposes because the fact of liability is not fixed ( Portland Copper & Tank Works, Inc., CA-1, 65-2 ustc ¶9687). For example, advance deductions have been denied for additions to a reserve for expected cash discounts on outstanding receivables, amounts credited by a manufacturer to a reserve for possible future warranty service, and additions to a reserve covering estimated liability of a carrier for tort claims. However, to the extent that the Code specifically provides for a deduction for a reserve for estimated expenses, the economic performance rules ( ¶1540) do not apply ( Code Sec. 461(h)(5)).
https://answerconnect.cch.com/contents-document/mtg012e61a34...