On Dec 19, 6:25 pm, "nish" <ni...[at]nunya.org> wrote:
- quote -

No idea. (I wrote this example to make things clear for myself: Let's
you say the payer is in 35% tax bracket and receiver in 10%. If the
payer pays 10k of interest, they save 3.5k. The receiver pays 10% or
1k. So the IRS has lost 2.5k.)

16% after missing a few years of interest does seem reasonable to me
as they're getting compensated for 10% they should have got in the
previous year, along with the interest on that 10%.

Also, the loans on prosper.com are in the range of 16%.

But I have no official experience in the matter.

--
<< ------------------------------------------------------- > << The foregoing was not intended or written to be used, > << nor can it used, for the purpose of avoiding penalties > << that may be imposed upon the taxpayer. > << > << The Charter and the Guidelines for submitting posts > << to this newsgroup as well as our anti-spamming policy > << are at www.asktax.org. > << Copyright (2007) - All rights reserved. > << ------------------------------------------------------- >

<removeps-groups[at]yahoo.com> wrote in message
news:045bc847-b3fd-44e7-91b5-d350475e86b0[at]o4g2000pra.googlegroups.com...
- quote -

What is the threshhold? Do you mean some absolute dollar amount per year?

nish

--
<< ------------------------------------------------------- > << The foregoing was not intended or written to be used, > << nor can it used, for the purpose of avoiding penalties > << that may be imposed upon the taxpayer. > << > << The Charter and the Guidelines for submitting posts > << to this newsgroup as well as our anti-spamming policy > << are at www.asktax.org. > << Copyright (2007) - All rights reserved. > << ------------------------------------------------------- >

removeps-groups[at]yahoo.com wrote:
- quote -

I've not had time to research the upper end, but the IRS' interest lies
in potential income shifting. Mom (retired 10% marginal rate) lends me
(working, 33% in good years) money and if I pay her too high a rate,
eyebrows get raised as this is just a way to shift money to her, and
potentially evade taxes.
It's the mirror image of me charging a relative too low an interest
rate, which is also an IRS no-no.
Joe

--
<< ------------------------------------------------------- > << The foregoing was not intended or written to be used, > << nor can it used, for the purpose of avoiding penalties > << that may be imposed upon the taxpayer. > << > << The Charter and the Guidelines for submitting posts > << to this newsgroup as well as our anti-spamming policy > << are at www.asktax.org. > << Copyright (2007) - All rights reserved. > << ------------------------------------------------------- >

On Dec 17, 11:03 am, "nish" <ni...[at]nunya.org> wrote:

- quote -

Why not?

- quote -

Why would the IRS care? The 16% has to be reported as income on the
related party's return, so the IRS gets their cut all the same. They
might care if the entity making the interest payment is in a much
higher tax bracket then the entity receiving the interest payment, but
then again only if the amount is larger than a threshold. If the
entity making the interest payment is in a lower tax bracket, then
they ought to be sending you a thank you card.

--
<< ------------------------------------------------------- > << The foregoing was not intended or written to be used, > << nor can it used, for the purpose of avoiding penalties > << that may be imposed upon the taxpayer. > << > << The Charter and the Guidelines for submitting posts > << to this newsgroup as well as our anti-spamming policy > << are at www.asktax.org. > << Copyright (2007) - All rights reserved. > << ------------------------------------------------------- >

A taxpayer's business gets a line of credit from a related party (parents).
Loan terms are 10% on simple interest, but if interest payments are not
paid, under terms of the credit line the interest rate is increased to 16%
and the interest changes from simple to compounding.

The business struggles for a few years and pays no interest at all on the
loan. Finally business shows a profit and starts to make payments on the
compounded interest.

Would IRS allow the change to compounding interest?

I understand IRS might not like a related party loan that charges more than
8%, but it's hard to see how the facts above benefited the lender, who
effectively had no payments against their loan for years. And it is clear
the lender had a very significant risk of losing their entire principal
loaning to an unsuccessful business that was running losses. It's unlikely
a bank would have made a similar extension of credit on a startup business
with no collateral, and the terms of any credit card loan would have been
far far worse than the terms extended here.

Just for purposes of argument, assume that the terms of the credit line do
not run into any usury law problems in the state where the loan is made. I
am interested in just the IRS issues related to the loan.

nish

--
<< ------------------------------------------------------- > << The foregoing was not intended or written to be used, > << nor can it used, for the purpose of avoiding penalties > << that may be imposed upon the taxpayer. > << > << The Charter and the Guidelines for submitting posts > << to this newsgroup as well as our anti-spamming policy > << are at www.asktax.org. > << Copyright (2007) - All rights reserved. > << ------------------------------------------------------- >