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I had lent $8,000 to a close friend last year and he now wants to pay me back. There was no loan agreement drawn up. I had directly paid for his purchase using a check drawn from my account. And now, he would be returning back that amount to me by a check drawn from his account. Do I/he have any IRS tax reporting obligations connected with the transaction?
(Additional, maybe irrelevant, info: I am on H-1B, he is on F-1)
Assuming that your friend is not paying you interest on the loan, then there is no need to report anything to the IRS on this. Loaning money interest free is not a taxable event, unless the amount is over $13K (the annual gift exclusion) - in that case if there isn't a clear contract that specifies a firm date when the money would be repaid it could be construed to be a gift rather than a loan. But for $8K - no problem.
QUOTE,"I had lent $8,000 to a close friend last year and he now wants to pay me back. There was no loan agreement drawn up. . ."--So, there is no written loan agreement, the IRS would likely disallow the loan andregard it as an income to your friend. For a loan made at a low or no stated interest rate, the IRS may impute interest. This means that u, as a lender, must recognize interest income on $8,000 equal to the imputed interest , and your buddy has an implied interest payment to u , a lender. In this case, your buddy would then be taxed on the income of $8,000. You need to prepare your written loan agreement. Usually, the IRS carries a minimum interet rate, afr,Applicable federal rate,depending on loan terms below which they consider the loan a gift as well. The minimum interest rate now is just under 5% per annum. If you don't charge your friend at least that, you risk having the loan considered a gift, and your friend having to pay tax on the loan proceeds.
There is a big difference in the letter and the spirit of the law. I think ebaines reply is a much better and more accurate one. Since the amount of the loan was under the gift tax threshold, there is no need to report it. And therefore no tax implication.Quote:
Originally Posted by wnhough
QUOTE,"Since the amount of the loan was under the gift tax threshold, there is no need to report it. and therefore no tax implication."---Ok, I think that it depens on each SPECIFIC AND CHARACTERISTIC situation; there is one example that I want to introduce here.
QUOTE," Marilyn makes a loan to her daughter Jill so she can start a business. Let's assume that, using the AFR, the annual interest would amount to $3,500. But Marilyn decides to simply forgo this yearly interest to help Jill with her tight money problems. So far, so good. There are no gift tax implications to Marilyn because the foregone interest is less than the $11,000 annual gift tax exclusion. As long as Jill has net investment income of $1,000 or less, Marilyn will not have any interest income to report. Likewise, since the interest isn't paid, Jill has no interest expense to deduct.
But let's change the picture a little bit. Let's say that Jill's net investment income amounts to $2,000. In this case, because Jill's net investment income is greater than $1,000, Marilyn will be required to report $2,000 as interest income, and Jill will have an interest deduction for $2,000.
The below-market rules can get a little tricky, so if you are thinking about making a loan with family members or any other related party (such as employee-employer, an individual or a friend to his or her corporation or partnership, and many others), make sure that you have a firm grip on the rules. You can read much more about related-party transactions and the below-market interest rules in IRS Publication 550 at the IRS website."
I would say I would worry much less about any tax problem and more about being paid back. If they are wanting to pay you back, get it back and personally until it is, I would have them sign paperwork on the loan
But that is NOT the circumstances indicated here. We try to answer the questions asked. Sometimes we have to talk in generalities because the OP doesn't give us enough info. That wasn't the case here.
Oh Ok, Wait. ScottGem , in this particular case, You are correct; Quite frankly, I got confused between the concept of just general loan with no any rate of interest charged and GIFT LOANS!!
In the case of gift loan, I mean LOANS to family members( I DON'T KNOW if a close friend also qualify, bud), NO INTEREST is IMPUTED on loans of $10,000 or less, not $13,000, the annual tax exempt gift ceiling for 2010, bud~~ BUT the loan proceeds ARE NOT used to purchase income-producing propeorty, Imean, i.e. stocks, bonds or similar portfolio investment. And also no intereset in imputed on a gift loan of $100,000 or less if the borrower's net investment as indicated in the example, for the year doesn't exceed $1,000, bud~
Please make a note of this~~
QUOTE, " I would have them sign paperwork on the loan"--Absolutely~~~Quote:
Originally Posted by Fr_Chuck
To sum it up, it is not ABSOUTELY ISSUE( MATTER) of the amount of annual taax exempt ceiling of GIFT, $13,000 BUT it DEPENDS ON each specific situation, budsss~~~~Quote:
Originally Posted by wnhough
Wnhoufgh:
I mentioned the $13K amount not because I was thinking about imputed interest, but rather I was thinking about the possibility of gift taxes being due (or at least a gift tax form having to be filed) if there is no clear expectation that the principal would ever be paid back, in which case the loan could be considered a gift.
And who is bud?
QUOTE," . . .if there is no clear expectation that the principal would ever be paid back, in which case the loan could be considered a gift.""--Right, exactly. I understand what u mean.
"And who is bud? "--Oh, I was talking to ScottGem.
Considering anyone who accesses the Internet can read this forum, precision as to WHOM you are addressing your comments is recommended! :-)
I believe it is the amount of the loan that cannot exceed $10K before interest is imputed, not the amount of the interest. I also think that the amount is $10K and not $13K. The $10K amount is referenced in Code § 7872(c)(2) and I don't believe it is indexed for inflation.
Yes, You are right!Quote:
Originally Posted by IntlTax
This is from IRS publication 550 -Investment Income and Expenses - Interest Income:
"For gift loans between individuals, if the outstanding loans between the lender and borrower total $100,000 or less, the forgone interest to be included in income by the lender and deducted by the borrower is limited to the amount of the borrower's net investment income for the year. If the borrower's net investment income is $1,000 or less, it is treated as zero. This limit does not apply to a loan if the avoidance of federal tax is one of the main purposes of the interest arrangement."
Also the imputed interest and any gift tax problems generally do not apply when a loan totals no more than $10,000.
---Ok, I see. Thanks alot~~Quote:
Originally Posted by MukatA
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