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Protect your tax interests on intrafamily loans

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in Small Business Tax

Suppose one of your relatives—perhaps a favorite nephew or niece—needs money to help finance a new business. Naturally, you’d like to help out if you can. However, at the same time, you don’t want to “give away the farm” without any assurances.

Strategy: Formalize the loan in writing. In particular, make sure you charge the going interest rate and spell out all the key terms in the document. Otherwise, you risk losing your “seed money” for the venture.

Even worse, you might be forced to pay tax on interest income you never actually receive!

Here’s the whole story: If you lend a relative more than $10,000 and you don’t charge any interest (or you charge a below-market interest rate), the IRS follows a three-step process under the “imputed interest” rules: It treats the transaction as if you had:

• Charged interest to the borrower.
• Made the borrower a cash gift of the “interest element.”
• Actually received interest in retur...(register to read more)

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