Can the IRS Tax a Loan?

Is a loan taxable by the IRS?

In short, no. This is due to the fact that when you receive a loan, it is expected to be paid back. With that being said, there are three main avenues for taxation when it comes to “loans” – income, sales, and gift tax.

First and foremost, a loan must be legitimate by legal standards. This means that a loan agreement needs to be in place to detail exactly what is given and expected in return. This is true for loans received from the bank, as well as those from friends or family.

Whether or not the loan is from the bank or a third party, if the loan were to be forgiven the debt owed on your loan would then be taxable as a Cancellation of Debt Income (COD Income). Once the loan is forgiven, you will normally receive Form 1099-C reporting the income to you, and this gets reported on your personal income tax return.

What about taxing a loan as a sale?

Could the IRS claim that the proceeds from a loan are actually proceeds from a sale instead? In certain cases, yes, and to avoid such implications, it is imperative to ensure that all transactions between affiliated parties are properly structured. This includes, but is not limited to: legal titles, parties’ intent, and treatment of transactions by involved parties.

Additionally, there are certain times when loans can be considered for the “gift tax”, in which case any money received as an intended loan could be taxed as a gift. Usually the gift tax is applied when loaning or receiving money from family members. It is best to avoid these types of transactions in order to bypass any taxation.

The above information is of a general nature only and should not be relied upon for specific situations. Click here for additional tax services information.

Call Marlies Y Hendricks CPA PLLC at either 716-694-3500 or 910-769-8730 as required to set up an appointment.