Let's say that you own a business and I loan your business $100,000 cash. It's a 5 year loan at 10%, with the entire principal and accrued interest paid at the termination of the loan (5 years from now). I.e. no monthly or yearly payments due on the loan. Do I need to report the yearly accrued interest to the IRS as income?
Simply put...I'm not receiving cash every year...I get one payment at the end. Does the IRS expect me to show the yearly "interst earned but not paid" amount as income on my tax return?
Thanks!!
2007-01-21 06:19:24 · 5 answers · asked by rcarltonr 2 in Business & Finance ➔ Personal Finance
Most of the answers say no, but I'm not totally sure of that.
A zero-coupon bond is very similar to what you describe, and the IRS "imputes" an interest payment and makes you pay taxes on it.
2007-01-22 04:57:36 · answer #1 · answered by Quixotic 3 · 0⤊ 0⤋
No. Taxes are paid on a cash accounting basis, not an accrual basis. You should not accrue any interest income for tax purposes until it is actually received.
This occurs all the time in business and is called a deferred tax asset/liability. The occurrence is due to corporations recognizing revenue and expenses (like interest revenue from your loan) on an accrual basis (before it is received, but legally has been earned or spent) but only paying taxes on a cash accounting basis. As a result the taxes a company shows in its SEC filing and the taxes it pays uncle sam differ.
2007-01-21 16:51:52 · answer #2 · answered by MagicalMke 4 · 0⤊ 0⤋
If you receive NOTHING in your hand then NOTHING is reported. ONLY during the year of the payment is the amount reported.
The IRS wants to know HOW MUCH money you make. If nothing touched your hands or got transferred automatically through banking means then you really did not receive ANYTHING !!
The interest incurred means nothing for it wasn't given to you yet. Also head to a good tax accountant, especially on the year this loan will come due. Always pay someone well for knowing more than you and working things for you. I pay my accountant well because I do not want to learn all the new tax codes every year.
: )
2007-01-21 06:37:39 · answer #3 · answered by Kitty 6 · 0⤊ 0⤋
There are a lot of empty spots in your question. It depends on their business, what type, and your business as well. Also, what type of loan has been setup, secured or unsecured, for instance.
A good rule of thumb is Uncle Sam always wants their money, the sooner - the better.
2007-01-21 08:15:50 · answer #4 · answered by Mike 1 · 0⤊ 1⤋
Probably
2007-01-21 06:23:52 · answer #5 · answered by smiling_freds_biz_info 6 · 0⤊ 0⤋