• Skip to main content
  • Skip to primary sidebar

  • Home
  • About
  • Contact

Family Loans — Tax Considerations

March 18, 2020 by admin

The Neal Group - Business TaxObtaining financing to start or expand small businesses and buy homes can sometimes be difficult. If your child or grandchild is having a hard time getting a loan from a commercial lender, you may be willing to help out by lending the money yourself.

Have a Written Agreement

Start by putting the loan agreement in writing. This may seem like an unnecessary formality, but without a written loan document, the IRS could argue that the transaction was a gift instead of a loan, potentially creating gift tax issues.

Having written documentation is also important in case the borrower fails to repay all or part of the loan. In that situation, you’d want to be able to show you’re entitled to write off the unpaid amount as a nonbusiness bad debt.

Charge Adequate Interest

The second step is setting an interest rate. While there’s no rule against interest-free loans or loans that have below-market interest rates, in a family context they can lead to tax complications. If you don’t charge sufficient interest, the difference between the amount of interest you actually receive (if any) and the amount you should have received — referred to as “imputed” interest — is taxable to you.

You can avoid the imputed interest rules by charging interest at the appropriate “applicable federal rate” (AFR). The IRS publishes AFRs monthly for loans of different maturities. These rates have been relatively low recently, reflecting the current market interest rate environment. For example, in February 2019, the annual AFR (using a monthly compounding assumption) was:

  • 2.57% for a short-term loan (three or fewer years)
  • 2.63% for a mid-term loan (more than three but no more than nine years)
  • 2.91% for a long-term loan (more than nine years)

These are the minimum rates for intra-family loans initiated in February 2019. For a term loan, the rate can remain fixed for the life of the loan. For a demand loan (one that gives you the right to demand full repayment at any time), you have to charge a floating AFR to avoid imputed interest issues.

Exceptions

When you lend your child or grandchild no more than $100,000, the amount that can be added to your taxable interest income under the below-market interest rate rules generally can’t exceed the borrower’s net investment income. Even better, you won’t have to report any imputed interest if the borrower’s net investment income amounts to $1,000 or less. You can also sidestep imputed interest on small loans of no more than $10,000 (all outstanding principal) provided the borrowed funds aren’t used to buy or carry income-producing assets.

Our goal is to make the process of tax planning and preparation a simpler process that provides timely, meaningful information, and assists you in minimizing your tax liabilities currently and into the future. If you would like to schedule a complimentary initial consultation to learn more about the tax preparation and tax planning services we offer to Milwaukee businesses and individuals, call us today.

Filed Under: Tax Services

Primary Sidebar

Search

Archives

  • February 2023
  • January 2023
  • December 2022
  • November 2022
  • October 2022
  • September 2022
  • August 2022
  • July 2022
  • June 2022
  • May 2022
  • April 2022
  • March 2022
  • February 2022
  • January 2022
  • December 2021
  • November 2021
  • October 2021
  • September 2021
  • August 2021
  • July 2021
  • June 2021
  • May 2021
  • April 2021
  • March 2021
  • February 2021
  • January 2021
  • December 2020
  • November 2020
  • October 2020
  • September 2020
  • August 2020
  • July 2020
  • June 2020
  • May 2020
  • April 2020
  • March 2020
  • February 2020
  • January 2020
  • December 2019
  • November 2019
  • October 2019
  • September 2019
  • August 2019
  • July 2019
  • June 2019
  • May 2019
  • April 2019
  • March 2019
  • February 2019
  • January 2019
  • December 2018
  • November 2018
  • September 2018
  • August 2018
  • July 2018
  • May 2018
  • March 2018
  • February 2018
  • January 2018
  • December 2017

Categories

  • Best Business Practices
  • Business Accounting
  • Investment
  • Quickbooks
  • Real Estate Tax and Accounting
  • Retirement
  • Small Business Accounting
  • Tax Services
  • Uncategorized

Copyright © 2023 · https://www.nealgroup.net/blog