Making a personal loan to a family member or friend can create unexpected tax issues. If the loan carries little or no interest, the IRS might treat all or part of it as a taxable gift under the below-market loan rules.
The rules may also require you to report imputed interest income — interest the IRS treats you as having collected even though you never actually received it. To pass muster with the IRS, your loan should be backed by a written promissory note that includes the interest rate, a schedule showing dates and amounts for interest and principal payments, and the security or collateral, if any.
Charge an interest rate that equals or exceeds the applicable federal rates set by the IRS. They potentially change each month. Contact our office for details.