Question

Sharon made a $160,000 interest-free loan to her son, Todd, who used the money to pay for his masters at Baruch. Todd’s only sources of income were $25,000 from a florist business he runs part time and $490 of interest on his checking account. The relevant Federal interest rate was 5%. Based on the above information:_____
a. Todd's business net profit will be reducod by $3,000 (0S x $60,000) of interest expense.
b. Sharon must recognize $3,000 (0.05 x $60,000) of imputed interest income on the below- market loan.
c. Todd's gross income must be increased by the $3,000 (05 × $60.000) imputed interest income on the below market loan.
d. Sharon does not recognize any imputed interest income and Todd does not recognize any imputed interest expense.
e. None of the above is correet.

Answer 1

Answer:

b. Sharon must recognize $3,000 (0.05 x $60,000) of imputed interest income on the below- market loan.

Explanation:

When a family member makes an interest free loan, the IRS will calculate imputed interest, and that is generally considered a gift. When someone makes a gift, they are responsible for paying any applicable taxes.

In this case, Sharon will have to pay gift taxed for the imputed interest resulting form the loan.