Page 77 - Small Business Taxes

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lender and borrower total $100,000 or less. If b. The amount of the items. 16:31 - 2-Feb-2023
the borrower's net investment income is $1,000 c. The cost of complying with the be-
or less, it is treated as zero. This limit does not low-market loan provisions if they 5.
apply to a loan if the avoidance of any federal were to apply.
tax is one of the main purposes of the interest
arrangement. d. Any reasons, other than taxes, for
structuring the transaction as a be- Taxes
Treatment of term loans. If you receive a be- low-market loan.
low-market term loan other than a gift or de-
mand loan, you are treated as receiving an ad- Exception for loans to qualified continuing
ditional cash payment (as a dividend, etc.) on care facilities. The below-market interest Introduction
the date the loan is made. This payment is rules do not apply to a loan owed by a qualified
equal to the loan amount minus the present continuing care facility under a continuing care You can deduct various federal, state, local,
value, at the AFR, of all payments due under contract if the lender or lender's spouse is age and foreign taxes directly attributable to your
the loan. The same amount is treated as OID on 62 or older by the end of the calendar year. trade or business as business expenses.
the loan. See Original issue discount (OID) un- You cannot deduct federal income
der Interest You Can Deduct, earlier. A qualified continuing care facility is one or
more facilities (excluding nursing homes) meet- ! taxes, estate and gift taxes, or state in-
CAUTION
Exceptions for loans of $10,000 or less. ing the requirements listed below. taxes. heritance, legacy, and succession
The rules for below-market loans do not apply 1. Designed to provide services under con-
to any day on which the total outstanding loans tinuing care contracts (defined below).
between the borrower and lender is $10,000 or Topics
less. This exception applies only to the follow- 2. Includes an independent living unit, and This chapter discusses:
ing. either an assisted living or nursing facility,
or both.
1. Gift loans between individuals if the loan is • When to deduct taxes
not directly used to buy or carry in- 3. Substantially all of the independent living • Real estate taxes
come-producing assets. unit residents are covered by continuing • Income taxes
care contracts.
2. Compensation-related loans or corpora- • Employment taxes
• Other taxes
tion-shareholder loans if the avoidance of A “continuing care contract” is a written con-
any federal tax is not a principal purpose tract between an individual and a qualified con-
of the interest arrangement. tinuing care facility that includes all of the fol- Useful Items
lowing conditions. You may want to see:
This exception does not apply to a term loan
described in (2) above that was previously sub- 1. The individual or individual's spouse must Publication
ject to the below-market loan rules. Those rules be entitled to use the facility for the rest of
will continue to apply even if the outstanding their life or lives. 15 15 (Circular E), Employer's Tax Guide
balance is reduced to $10,000 or less. 2. The individual or individual's spouse will 334 334 Tax Guide for Small Business
be provided with housing, as appropriate
Exceptions for loans without significant tax for the health of the individual or individu- 510 510 Excise Taxes
effect. The following loans are specifically ex- al's spouse in an: 538 538 Accounting Periods and Methods
empted from the rules for below-market loans
because their interest arrangements do not a. Independent living unit (which has ad- 551 551 Basis of Assets
have a significant effect on the federal tax liabil- ditional available facilities outside the
ity of the borrower or the lender. unit for the provision of meals and Form (and Instructions)
other personal care), and
1. Loans made available by lenders to the 1040 or 1040-SR 1040 or 1040-SR U.S. Individual Income
general public on the same terms and b. Assisted living or nursing facility avail- Tax Return
conditions that are consistent with the able in the continuing care facility. Schedule A (Form 1040) Schedule A (Form 1040) Itemized
lender's customary business practices. 3. The individual or individual's spouse will Deductions
2. Loans subsidized by a federal, state, or be provided with assisted living or nursing Schedule SE (Form 1040)
municipal government that are made avail- care available in the continuing care fa- Self-Employment Tax Schedule SE (Form 1040)
able under a program of general applica- cility, as required for the health of the indi-
tion to the public. vidual or the individual's spouse. 3115 3115 Application for Change in
3. Certain employee-relocation loans. For more information, see section 7872(h). Accounting Method
4. Certain loans to or from a foreign person, Sale or exchange of property. Different rules 8959 8959 Additional Medicare Tax
unless the interest income would be effec- generally apply to a loan connected with the See chapter 12 for information about getting
tively connected with the conduct of a U.S. sale or exchange of property. If the loan does publications and forms.
trade or business and not exempt from not provide adequate stated interest, part of the
U.S. tax under an income tax treaty. principal payment may be considered interest.
5. Any other loan if the taxpayer can show However, there are exceptions that may require When To Deduct Taxes
that the interest arrangement has no sig- you to apply the below-market interest rate
nificant effect on the federal tax liability of rules to these loans. See Unstated Interest and Generally, you can only deduct taxes in the
the lender or the borrower. Whether an in- Original Issue Discount (OID) in Pub. 537. year you pay them. This applies whether you
terest arrangement has a significant effect use the cash method or an accrual method of
on the federal tax liability of the lender or More information. For more information on accounting.
the borrower will be determined by all the below-market loans, see section 7872 and Reg- Under an accrual method, you can deduct a
facts and circumstances. Consider all the ulations section 1.7872-5. tax before you pay it if you meet the exception
following factors. for recurring items discussed under Economic
a. Whether items of income and deduc- Performance in Pub. 538. You can also elect to
tion generated by the loan offset each ratably accrue real estate taxes as discussed
other. later under Real Estate Taxes. See also Foreign
income taxes, discussed later.
Page 18 Chapter 5 Taxes