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In the United States, I am considering a deal with a very close friend that would involve a loan. Please no answers warning about the potential emotional problems this poses. It's not a concern.

I'm fairly certain that I'm required to charge interest and, then, to report the interest as income.

This loan will be three year or less, in the amount of around $50k. It is for an investment.

Are there IRS guidelines for the structure of these loans? Is there a minimum interest rate? Does it need to be compounded monthly?

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In order to not be considered a gift, the appropriate Applicable Federal Rate must be charged. This varies by the term of the loan; short term is 0-3 years, medium is >3-9, long is >9+.

Investopedia discusses this a bit more, particularly including the time periods.

In your case, of course check the AFR for the month in which it's lent, but it will be around 0.45% annually compounded (give or take a bit). They've been going up lately, so pay attention (or charge a bit more to be safe).

You can also read the IRS regulations here, in publication 550.

And as David's answer states, you must declare all interest as income.

  • Also, to clarify something here that wasn't clear in a similar answer on another question: the loan wouldn't be a gift, but the interest would be, if you under-charged. IE, whatever interest you didn't charge under the AFR would be a gift. As usual, consult a CPA or tax advisor etc. etc. – Joe Apr 22 '15 at 14:10
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Here's some good info: http://finance.zacks.com/pay-taxes-interest-collected-personal-loan-10164.html

"Interest from a personal loan is always reported on the “Taxable interest” line of your return. But if your total interest income for the year – not just the interest collected on the loan – is more than $1,500, you'll need to report it on a Schedule B attachment to your return. Schedule B just requires some of the details surrounding your interest earnings."

However, it looks like if the loan is less than $10k (and it's not used to invest) then you are free to charge below-market rates without tax implications.

  • What about rates? – Matthew Apr 14 '15 at 2:19

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