Which of the following interest-free loans is subject to the imputed interest rules?
I.Lena needed $5,000 to pay off some gambling debts. Her employer loans her the $5,000.
II.Sherry loans her son $130,000 to purchase a motor home to use in his landscaping business. Her son has no investment income for the year.

A)Only loan I.
B)Only loan II.
C)Both loans.
D)Neither loan.

Question

Which of the following interest-free loans is subject to the imputed interest rules?
I.Lena needed $5,000 to pay off some gambling debts. Her employer loans her the $5,000.
II.Sherry loans her son $130,000 to purchase a motor home to use in his landscaping business. Her son has no investment income for the year.
​
A)Only loan I.
B)Only loan II.
C)Both loans.
D)Neither loan.

Quizplus · Accepted Answer

Only loan II is subject to the imputed interest rules because the loan amount exceeds the threshold set by the IRS ($10,000 for individuals). Since Sherry does not charge her son any interest, the IRS will consider the forgone interest as imputed interest and require Sherry to report it as taxable income. Loan I is exempt from imputed interest rules as the loan amount is below the threshold.

Which of the Following Interest-Free Loans Is Subject to the Imputed