IRC sec 7872 applies to - Treatment of loans with below-market interest rates
(c)Below-market loans to which section applies
(1)In general
Except as otherwise provided in this subsection and subsection (g), this section shall apply to—
(A)Gifts
Any below-market loan which is a gift loan.
Gift loan The term “gift loan” means any below-market loan where the forgoing of interest is in the nature of a gift.
the loan is above the $10,000 de minimis exception for gift loans between individuals
reg 1.7872-5T(b) may give you an out.
(14) Loans the interest arrangements of which the taxpayer is able to show have no significant effect on any Federal tax liability of the lender or the borrower, as described in paragraph (c)(3) of this section; and
(c)(3) Loans without significant tax effect. Whether a loan will be considered to be a loan the interest arrangements of which have a significant effect on any Federal tax liability of the lender or the borrower will be determined according to all of the facts and circumstances. Among the factors to be considered are—
(i) Whether items of income and deduction generated by the loan offset each other;
(ii) The amount of such items;
(iii) The cost to the taxpayer of complying with the provisions of section 7872 if such section were applied; and
(iv) Any non-tax reasons for deciding to structure the transaction as a below-market loan rather than a loan with interest at a rate equal to or greater than the applicable Federal rate and a payment by the lender to the borrower.
This is almost certainly a gift loan because from the IRS viewpoint no bank would lend you over $50K for a month interest free.
If questioned by the IRS, there is no self-reporting that you loaned someone money, you could offer the argument that most credit cards do not charge interest if the entire balance on the previous statement is paid in full by the next payment due date. this period ranges from 25 to 30 days. No guarantee this would work.
the applicable federal rate for a short-term loan is about 5%. what would the interest be by multiplying the loan by 5% and dividing by 12 or days loan outstanding/365. Would this income significantly affect your tax liability. This is a judgment call.
