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Tax Law (Questions About Taxes)/Loan Between Friends
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Question
I need to borrow $85k from a generous friend. He has agreed this will be an interest-free loan and I plan on paying it back in less than a year. However I've read that the IRS will still imposed an applicable federal interest rate on my friend for lending me the money. Is he required to report the imputed interest? Is there anyway he can avoid reporting the IRS imposed interest? Maybe document it as a demand loan? If so, how should we report this interest free loan in our tax return?
Det,
Thanks for your question.
There is no legal way to avoid the imputed interest. You will have interest expense for the amount of imputed interest. If it is a business or investment loan, the amount may be a deduction for you.
He will have interest income in the amount of imputed interest, which must be reported on his return. In addition, he will be considered to have given you a gift of the amount of interest. If this exceeds $12,000 he must file a gift tax return. However, there is a $1,000,000 lifetime exemption, so it is likely no gift tax would be due.
Hope this helps.
John Stancil, CPA
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John Stancil, CPA
Expertise
I can answer questions on personal income taxes, partnerships, and some corporate income taxes. I can deal with some state tax questions. Limited gift and estate tax questions. I am also familiar with ministerial and church tax reporting issues. I teach tax and accounting at a small church-related college. Sales taxes and property taxes are state and local issues so I am not likely be be able to give you an in depth answer on those types of taxes. I have maintained a part time tax practice for over 35 years. I am a member of the AICPA, National Association of Tax Professionals, and the Institute of Management Accountants. Visit my website at www.johnstancilcpa.com. Also visit my blog, www.thetaxdocspot.com. Prepare and file your own taxes at www.1040stancilcpa.com
Experience
I hold a doctorate in Accounting, and four professional certifications: CPA, CMA, CGMA, and CFM. I passed all certification examinations on the first attempt, and received honorable mention for my scores on the CIA exam. I have operated a CPA firm for over 30 years and have taught accounting and tax at the college level for over 30 years.
Organizations
AICPA, FICPA, IMA, NATP
Publications
The CPA Journal, Florida CPA Today, Green Consumer, Green Business, Global Sustainability as a Business Imperative, Palmetto Review, NATP TaxPro Quarterly.
Education/Credentials
DBA University of Memphis
MBA University of Georgia
BS in Accounting Mars Hill College
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