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For example, if I lend a small business $100,000, and they'll pay me back $10,000 in one year. How would I expect taxes to be done?

Would the $10,000 be considered ordinary income, or capital gains, or something else entirely?

Likewise, what would the tax situation be like for the other person (i.e., the person receiving the loan)?

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  • Which country are you in?
    – Ben Miller
    Commented May 31, 2015 at 3:45
  • Are you saying you lost $90,000 on the one year loan?
    – DJohnM
    Commented May 31, 2015 at 4:03
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    If the company paid back only the first 10th of the loan (with more to follow), not all of that is interest, assuming standard amortization rather than balloon or other odd loan structure. If that was your question, we need to go into more detail.
    – keshlam
    Commented May 31, 2015 at 6:07
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    The rate and repayment period should be specified in the loan documents. You should also provide proper receipts to document the split between interest and principal after each payment or at the end of the year.
    – mhoran_psprep
    Commented May 31, 2015 at 11:52
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    When do you get the full amount back? Your use of the words "pay me back" implies a principal payment, not interest, and you haven't accounted for any of the other money you lent them. How is the loan structured? When, how much, what interest rate?
    – Chris W. Rea
    Commented May 31, 2015 at 13:07

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If it is a business loan, the borrower would be able to claim a deduction for any interest paid on the loan and the lender would include the interest earned as part of their taxable income.

You need to be careful on what you do and don't include as income. If the repayments made to you by the borrower in a year is $10,000 but only $8,000 of that is interest and the other $2,000 is part of the principal being returned to the lender, then you would only claim $8,000 as your income and the borrower would only claim $8,000 as a business deduction.

Of course if it is interest only, then you and the borrower would use the full $10,000.

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