When you loan money to a friend or family member with the intention of having the money paid back you should take necessary steps to document the agreement, including an executed promissory note, interest, and a repayment schedule. You can use the applicable federal rate (AFR) to calculate interest on the loan based the maturity date. Generally, loans like these are either demand loans, which have no set maturity dates and are payable on demand, or term loans with set maturity dates. The interest earned is taxable to the lender and could be deductible by the borrower, depending on what the loan proceeds are used for.

For family loans over $100,000, the IRS requires you to charge interest. If you do not charge interest, or the interest charged is below the Applicable Federal Rate (imputed interest), the loan is considered to be below-market and could have gift and income tax consequences.

Contact your KS-LLP professional to learn more about dealing with gift taxes and filing estate and gift tax returns.