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Sidestep a tax trap for intra-family loans

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in Small Business Tax

If your child is graduating from college or grad school, you’ll want the youngster to start off on the right foot. For instance, John or Susan might need seed money for a business start-up or to help pay the first-year’s rent in their new digs.    

Strategy: Give your child a low-interest, or even a no-interest, loan. As long as you stay within the tax law boundaries, your family will have no tax worries. However, if you’re not careful, you could wind up facing tax complications.

With the interest rates on the low side, this may be a good time to arrange a loan from a gift tax perspective (see box below).

Here’s the whole story: The tax law discourages intra-family loans where the lender doesn’t charge any interest or charges interest at a below-market rate. In brief, interest income may be imputed to the lender under a three-step process:

  1. You’re treated as having charged interest to the borrower.
  2. You’re then treated as mak...(register to read more)

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