Mera made an $85,000 interest-free loan to her son, Arthur Curry, Jr., who used
ID: 2334822 • Letter: M
Question
Mera made an $85,000 interest-free loan to her son, Arthur Curry, Jr., who used the money to pay off the mortgage on his primary residence and to buy municipal bonds. Arthur’s only income for the year is his salary of $55,000 and $1,800 interest income on the bonds. Assume the relevant Federal interest rate is 5% annually. The loan is outstanding for the entire year. (14 points)
Based on the above information, what is the effect of the loan on Mera’s gross income for the year?
In addition to the $85,000 loan in the current year, you discover that Mera made another loan of $25,000 to Arthur in a previous year. Arthur used the funds to set up a pool cleaning business. What are the effects, if any, on Mera’s gross income.
What are the effects, if any, on Arthur’s income and expenses?
Explanation / Answer
(1) IRS does not allow interest free loan, It is compulsary to charge AFR (Applicable federal rate) and treated as part of income and include in income
In the given case Mera will have to account for interest income of $4250 ($85000*5%)
(2) Interest on $25000 i.e $1250 ($25000*5%) will also constitute as part of Mera's income
(3) Further $4250 and $1250 will be allowed as business expenditure if(any) to Arthur.