@MarkFrost wrote:
Thank you for your response. Does imputed interest apply if the interest is calculated at an AFR? The amount of interest is appropriate, but the interest is not collected in cash, it is gifted.
Right. The IRS expects taxpayers to conduct their affairs in a businesslike manner, and that includes charging interest on loans. The lender must report as taxable income, the interest they collected or could have collected if they charged at least the AFR, even if they did not actually collect the interest.
If you said the parent collected the interest and then gifted it back, the collected interest is taxable income to the parent. If you said the interest was forgiven and never collected, the parent must still report interest income equal to the interest they would have collected if they charged at least the AFR.
