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Finance

Is a Loan Taxable Income?

See what the courts had to say
1 min read
Opinions expressed by Entrepreneur contributors are their own.

Tax court cases have asserted that advances from a loan or a line of credit don't constitute income if the transaction is considered to be a debtor-creditor relationship. If the creditor has an enforceable obligation against the debtor to force repayment, that's a loan. Another factor is whether an interest rate for the loan has been established contractually. The bottom line in your situation is that a loan pursuant to an arm's length transaction, such as a line of credit advanced by a bank, will be treated as a loan from a tax standpoint.

As always, some people have gotten creative in their tax planning. The tax landscape is littered with failed cases where people tried to disguise payments for future services as loans. A payment in return for a future obligation to render services, such as an advance of salary, isn't a loan. Be careful not to fall into that pit.

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