The short answer is that, friendly or not, ALL interest income is taxable
(with a few exceptions such as interest on obligations of state governments
and their political subdivisions - think school bonds and other municipal
Congress (at the urging of the IRS) even went so far as to tax "imputed
interest" when the loan provides for NO interest, such as on loans to our
children, if the amount loaned is large. It has been decades since I looked
seriously at this topic and I'm sure it must have changed from what I
remember, so be sure to check the current rules and rates. When it first
began (in about 1970?), the rule said that if the lender did not charge at
least 5%, then he must "impute" a rate of 6% and report that amount as
income, even if no interest was required or paid. The tax code provided
specific rules for calculating the annual amount. The good news (maybe) was
that the borrower could deduct that same amount as interest expense - back
when we could deduct all interest paid, even on cars and credit cards.
These rules were - and are - mandatory. TTax might "want" a 1099, but that
is not required and the taxability does not depend on filing a 1099,
although that might make it easier for borrower and lender to synchronize
My understanding is that this pattern is still in effect, although the rules
and rates have been changed to reflect near-current economic conditions. I
say "near" current because it usually takes a few years for Congress and the
IRS to catch up to market changes. Plenty of reading about this is
available if you Bingle for "imputed interest income".
In TurboTax 2011, you should list your interest income on Schedule B,
probably via the Interest Income Smart Worksheet. Or simply enter the
payer's name, social security number and address directly on Line 1 of
The borrower, unfortunately, will probably not be able to deduct the
interest at all, unless it is deductible on Schedule C as a business
The lender and the borrower should each consult with a CPA or other
competent tax adviser before filing his or her return.
R. C. White, CPA
San Marcos, TX
(Retired. No longer licensed to practice public accounting.)
Microsoft Windows MVP (2002-2010)
(Using Quicken 2012 Deluxe R 5 and Windows Live Mail in Win7 x64)
Question on a friendly loan of about $50k -
made to someone over last couple of years,
at a straight rate of 5% -
monthly interest payment is $215 - no principal payment.
So, for a given year, the interest is $215 x 12 = $2,580
Since this was a freindly, off the radar loan, no 1099,
was just wondering how it could be reported on both sides ?
#1 - Where would the borrower detail the interest payments made ?
#2 - Where would the lender detail the interest payments received ?
(tried on the Sched B - Interest - but it wants a 1099 form)