Malik's grandfather has loaned him $110,000 toward opening a restaurant and has told Malik that the loan is interest-free. Why might this be a problem?

The loan is for too much money.

Malik shouldn't borrow money from his relatives.

The IRS requires that all loans for more than $100,000 be at market-rate interest.

The IRS will charge Malik a transaction fee.

Question

Business

Donna Benson

7 December, 13:26

Malik's grandfather has loaned him $110,000 toward opening a restaurant and has told Malik that the loan is interest-free. Why might this be a problem?

The loan is for too much money.

Malik shouldn't borrow money from his relatives.

The IRS requires that all loans for more than $100,000 be at market-rate interest.

The IRS will charge Malik a transaction fee.

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Answers (1)

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Aliza Fletcher · Answer 1

First, we should understand that loans are not gifts, secondly, the IRS has a strict tax rule on both family gifts and a family loan. Note, the annual limit for tax-free gifts to individual family members is $14,000, in this case, it is important to include interest rate since the said amount is more than the $14,000, also the interest on the loan must be at least as high as the minimum interest rates set by the IRS. Therefore, in this scenario, the loan has to come with an interest rate.