Sharon made a $60,000 interest-free loan to her son, Todd, who used the money to start a new business. Todd’s only sources of income were $25,000 from the business and $490 of interest on his checking account. The relevant Federal interest rate was 5%. Based on this information:
A. Todd’s business net profit will be reduced by $3,000 (0.05 × $60,000) of interest expense.
B. Sharon must recognize $3,000 (0.05 × $60,000) of imputed interest income on the below-market loan.
C. Todd’s gross income must be increased by the $3,000 (0.05 × $60,000) imputed interest income on the below-market loan.
D. Sharon does not recognize any imputed interest income and Todd does not recognize any imputed interest expense.
E. None of these is correct.
Answer: D
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