LendingKarma Loan Agreements and Taxes

09/04/12 9:24 PM

Tax time is right around the corner which means that for lenders it’s time to tally up the amount of interest received throughout last year’s loan repayment because Uncle Sam wants his share of the profits. The interest you’re charging on your loan is considered investment income by the IRS. If you’re not charging interest on your loan agreement you should be careful as the IRS may calculate the interest amount for you and consider it taxable income. This is called imputed interest. Gift tax also enters into the equation with larger interest-free loans. There’s a good overview of imputed interest here. LendingKarma can help you to document your loan payments and interest to help you to avoid this situation.

He needs his cut of your profits

Assuming you’ve properly documented your loan, either on your own or with our “karma builder” custom loan agreement creator or our blank loan forms, the next step is to gather all of your check stubs or receipts for all the payment received throughout the last tax year. Once you’ve done that you add up all of the interest portion of each payment until you get a final amount for the year. That amount ends up being reported on a Schedule B form. If you’ve been tracking repayment using LendingKarma Premium you can simply sign in to your LendingKarma account and download your tax report that contains your interest totals for the year.

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