Question

Joanne starts her new job with Nanna Corp. on January 1st. As part of her arrangement with Nanna, Nanna is going to loan him $500,000 at a 2% interest rate with no principal payments required to help him purchase a new home. If Joanne went to the bank for such a loan, she would need to pay a 6% rate and the loan would be amortized. Does she have taxable income in the first year, and if so how much?

Answer 1

Sol:

When Joanne has taken loan with Nanna corp, she has to pay only interest on the loan borrowed. As she does not need to pay principal amount.  When loan is taken from Nanna Corp, The taxable income is to the extent of the non-repayment of Principal amount.

Let us calculate interest on loan of $500,000 at 2% (assuming simple interest) = 500,000 x 2 / 100 = $10,000

So the remaining Principal Amount after payment of interest for 1st year  is Entire loan amount less Interest for 1st year

= $500,000 - $10,000 = $490,000, which is treated as taxable perquisites, if the loan is taken from Nanna Corp.

So Joanne has taxable income in first year amounting to $490, 000

For computing taxable income in the hands of Joanne, the amortized loan taken from bank is irrelevant