Hi, ps56k.
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 obligations).
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 their reporting.
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 Schedule B.
The borrower, unfortunately, will probably not be able to deduct the interest at all, unless it is deductible on Schedule C as a business expense.
The lender and the borrower should each consult with a CPA or other competent tax adviser before filing his or her return.
RC
-- R. C. White, CPA San Marcos, TX (Retired. No longer licensed to practice public accounting.) snipped-for-privacy@grandecom.net 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 ?
Using TurboTax....
#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)