I lent a friend around $10K to help him start a own small business. Now he has started earning money and wishes to return my money plus some extra (~500) to acknowledge my help.
Is the money considered taxable?
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1yes, anything above the principal repaid (interest + fees) would be taxable income– amphibientJun 2, 2014 at 22:38
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You need to specify where you are. The answer may vary by country.– JohnFx ♦Jun 2, 2014 at 23:47
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@JohnFx Actually it is somewhat complicated. I am in United States, and my friend is in China.– xisJun 3, 2014 at 0:15
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I suggest tagging your question with the tax jurisdiction you are asking about. That is, are you asking about your tax situation or your friend's?– JohnFx ♦Jun 3, 2014 at 0:40
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@JohnFx I am asking my problem, not his.– xisJun 3, 2014 at 1:02
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1 Answer
The $10,000 is not taxable to either of you, but the $500 is taxable income to you - and a deductible business expense for your friend.
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Could the $500 not legitimately be seen as a gift? It sounds like the $10K was not really an investment. I'm not suggesting doing something illegal/questionable, but as described this seems like a unique situation. Jun 3, 2014 at 14:37
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In the United States, the IRS takes a very dim view of 'gifts' that are given in return for other consideration. And the first words of the question are, "I lent a friend..." - loaning is certainly a form of investment.– ShawaronJun 3, 2014 at 16:28
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@Shawaron: I'm not doubting you, but do you have sources/more reading on this matter? Friends lend and gift money and other valuables to each other all the time, and it is not uncommon for amounts to match up exactly. Repaying the favor of a loan with some extra money as a gift seems like a "friend"ly enough thing to do.– IcydogJun 3, 2014 at 16:34