Notes Receivable and Allowances for Credit Losses

9 Months Ended

Apr. 30, 2025

Notes Receivable and Allowances for Credit Losses


4. Notes Receivable and Allowances for Credit Losses

As of April 30, 2025, our notes receivable portfolio consisted of notes receivable held for investment, including term loans to small and mid-market businesses and refund advance loans to consumers, and notes receivable held for sale, including term loans to small and mid-market businesses. We classify loans as notes receivable held for investment when we have both the intent and ability to hold until maturity or payoff. We classify loans as notes receivable held for sale when we have the intent and ability to sell substantially all of our rights, title, and interests in a qualified loan to a third-party investor. A loan that is initially designated as held for sale or held for investment may be reclassified when our intent for that loan changes. When a loan held for investment is reclassified to held for sale and recorded at the lower of amortized cost or fair value, the related allowance for credit losses for that loan is released, and any adjustment to record the loan at the lower of amortized cost or fair value is recorded.


Notes Receivable Held for Investment

Term loans to small and mid-market businesses. We provide financing to small and mid-market businesses via term loans that we originate directly or through an originating bank partner. During the nine months ended April 30, 2025 and April 30, 2024, we purchased term loans from our originating bank partner with principal balances in the amount of $2.4 billion and $1.2 billion, respectively. As of April 30, 2025, we had commitments to purchase $32 million in term loans that were originated on or prior to April 30, 2025.

The term loans are not secured and are recorded at amortized cost, which includes unpaid principal balances, deferred origination costs, and any related discount or premium, net of allowances for credit losses. As of April 30, 2025 and July 31, 2024, the net notes receivable held for investment balance for term loans to small and mid-market businesses was $1.4 billion and $912 million, respectively. The current portion is included in notes receivable held for investment and the long-term portion is included in other assets on our condensed consolidated balance sheets.

We maintain an allowance for credit losses on loans held for investment to reserve for lifetime expected credit losses in the loan portfolio. The allowance for credit losses is determined based on our current estimate of lifetime expected credit losses, historical credit losses, estimates of recoveries, and future expectations as of each balance sheet date. We evaluate the creditworthiness of our term loan portfolio on a pooled basis due to its composition of loans with similar general credit risk and characteristics. The allowance for credit losses is subjective and requires management estimates, including such factors as known and inherent risks in the loan portfolio, historical losses, adverse situations that may affect borrowers' ability to repay, and current and forecasted economic conditions. Expected credit losses are measured based on a loss forecasting model and calculated by applying loss curves derived from loan level risk segment and term mixes, aggregated at monthly loan vintages. Loss curves are estimated based on a combination of empirical loss curve data and management judgment. The methodologies are updated periodically to reflect factors such as actual loan performance and changes in assumptions based on loan risk characteristics. We use empirical data and management judgment to estimate losses for new credit tests or products for which we do not have enough history. When available information confirms that the specific loans or portions thereof are uncollectible, identified amounts are charged off against the allowance for credit losses. Loans are charged off as the contractual principal becomes 120 days past due or meets certain other charge-off policy requirements. Subsequent recoveries of the unpaid principal balance, if any, are credited to the allowance for credit losses. As of April 30, 2025 and July 31, 2024, the allowances for credit losses were not material. During the nine months ended April 30, 2025 and April 30, 2024, the amount of charge-offs recorded and the amount of recoveries on term loans to small and mid-market businesses were not material.

We consider a loan to be delinquent when the payments are one day past due. We place delinquent term loans on nonaccrual status and stop accruing interest revenue. Term loans are returned to accrual status if they are brought current or have performed in accordance with the contractual terms for a reasonable period of time and, in our judgment, will continue to make periodic principal and interest payments as per contractual terms. Past due amounts were not material for all periods presented.

Interest revenue is earned on term loans originated and purchased and held for investment in accordance with the specified period of time and defined interest rate noted in the loan contract. Interest revenue is recorded net of amortized deferred origination fees and costs, and loan discounts, and is included in service revenue in our condensed consolidated statements of operations. Interest revenue was not material for all periods presented.

Refund Advance Loans. Refund advance loans are loans available to eligible TurboTax customers based on a customer's anticipated income tax refund, at no cost to the customer. The loans are repaid from the customer's income tax refund, which is generally received within three to four weeks after acceptance of the customer's income tax return by the Internal Revenue Service (IRS). We partner with third-party issuing banks to originate the loans and subsequently purchase full participating interests in those loans. The refund advance loans are not secured and are recorded at amortized cost, net of an allowance for credit losses. As of April 30, 2025 and July 31, 2024, the net notes receivable balances for refund advance loans were $1 million and $4 million, respectively. We maintain an allowance for credit losses to reserve for potentially uncollectible loans. We estimate the allowance for credit losses based on expected funding of refunds by the IRS using historical trends. When we determine that any amounts are uncollectible, we charge them off against the allowance for credit losses. As of April 30, 2025 and July 31, 2024, the allowances for credit losses on refund advance loans were not material.


Notes Receivable Held for Sale

Term loans to small and mid-market businesses. We have entered into two forward flow arrangements with institutional investors that facilitate the sale of participation interests in unsecured term loans.

In August 2023, we entered into a forward flow arrangement with an institutional investor (2023 Forward Flow Agreement), which has since been amended, most recently in January 2025. Pursuant to the amended 2023 Forward Flow Agreement, we have a commitment to sell to the institutional investor a minimum of approximately $8 million monthly and $350 million cumulatively in participation interests in unsecured term loans to small and mid-market businesses over four years, subject to certain eligibility criteria. As of April 30, 2025, we have met the cumulative commitment to sell term loans under this arrangement, and the remaining monthly commitments total $218 million through July 31, 2027.

In January 2025, we entered into a forward flow arrangement with an institutional investor (2025 Forward Flow Agreement) that terminates on July 23, 2029. Pursuant to the 2025 Forward Flow Agreement, we have a commitment to sell to the institutional investor a minimum of $300 million in participation interests in unsecured term loans to small and mid-market businesses over the first 18 months of the arrangement, subject to certain eligibility criteria. The 2025 Forward Flow Agreement also includes monthly commitments that vary based on certain conditions, up to a maximum monthly commitment of $45 million. As of April 30, 2025, the remaining cumulative commitment totals $279 million.

Notes receivable held for sale are recorded at the lower of amortized cost or fair value determined on an individual loan basis. We recognize a gain or loss on sale of loans sold to third parties by calculating the difference between the proceeds received and the carrying value of the loans sold. As of April 30, 2025 and July 31, 2024, the balances of notes receivable held for sale were $47 million and $3 million, respectively, and are included in notes receivable held for sale on our condensed consolidated balance sheets. Total sales of term loans during the nine months ended April 30, 2025 and April 30, 2024 amounted to $288 million and $193 million, respectively. For the three and nine months ended April 30, 2025 and April 30, 2024, gains on sales of loans were not material.