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Jax Tax
Jax Tax, Tax Attorney
Category: Tax
Satisfied Customers: 1408
Experience:  JD, LL.M in Business and Taxation, IRS Enrolled Agent. Expert in Business and Tax Transactions
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What is the tax treatment on forgivable loans to brokers

Customer Question

What is the tax treatment on forgivable loans to brokers?
Submitted: 5 years ago.
Category: Tax
Expert:  Jax Tax replied 5 years ago.

Jax Tax : Debt forgiven is considered ordinary income unless an exception applies.
Jax Tax : If forgiven as a gift, it is not. If forgiven in association with some other type of income (say rent) of becomes rental income.
JACUSTOMER-ho6zrhwd- :

If the upfront award given is $700,000 over a period of 9 years and says it is a forgiveable loan is the incentive amount taxable as oridinary income when received or if the time period is a total of 9 years does the 700,000 get taxed in year 9? I have heard there is an established interest rate that is amortized and is taxable annually until the loan is forgiven.

JACUSTOMER-ho6zrhwd- :

Please clarify what part is taxable and when.

Jax Tax : If the principle is $700000 and on a set repayment, the amount that is forgiven each year is income in that year. So if forgiven over 9 years, it is taxed over 9 years.
Jax Tax : As for interest. If the loan calls for interest and it to is forgiven then it is also income in the year forgiven.
Jax Tax : You speak of an established rate. There is a minimum rate set by IRS "safe harbor rates" for related party transactions but typically the interest rate is set by contract within the loan document.
Jax Tax : Safe harbor rates Chang but are low 1% or so.
Jax Tax : Still, this is a rate that will be in the loan doc not just implied.
JACUSTOMER-ho6zrhwd- :

If the 700000 is to be paid over 5 years, and the loan rate is extremely small, why would they want to extend it to 9 years?

Jax Tax : You stated it was 9 years!. If it 5 years, then 5 it is.
Jax Tax : I must have Mister understood you.
Jax Tax : I must also be having problems typing today. If the loan is a five year term, the principle and interest will be income over 5 years as forgiven.
Expert:  Jax Tax replied 5 years ago.
Please let me know if you have additional questions.