How do I report interest on arrears received through a personal loan?
I made a personal loan several years ago to a business associate who was in poor health & desperate circumstances. The terms were 5% interest compounded annually on unpaid balance. I required no collateral and interest was due annually. I received no P or I payments for 4 years, but then just last week received a five figure payment that covered all interest in arrears. How do I report this to the IRS? Are there any special forms to file? I assume this is taxable interest income to me.
Congratulations on making a good choice to help someone. I'm glad that they've recovered and are repaying their obligation to you. You are correct the interest would be taxable to you. If you've had no other costs to service the loan, you should be able to claim it as interest income on Schedule B. Just make sure to keep track of how that amount was computed so should the IRS question the amount you have something to reference. I hope this helps and that they are able to continue repaying your loan.
Antowoine Winters, CFP®, Enrolled Agent
Next Steps Financial Planning, LLC