Is a Loan Taxable Income?

See what the courts had to say

Tax court cases have asserted that advances from a loan or aline of credit don't constitute income if the transaction isconsidered to be a debtor-creditor relationship. If the creditorhas an enforceable obligation against the debtor to forcerepayment, that's a loan. Another factor is whether an interestrate for the loan has been established contractually. The bottomline in your situation is that a loan pursuant to an arm'slength 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 taxplanning. The tax landscape is littered with failed cases wherepeople tried to disguise payments for future services as loans. Apayment in return for a future obligation to render services, suchas an advance of salary, isn't a loan. Be careful not to fallinto that pit.

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