On January 1 of the current year, Beverly borrows $100,000 from her employer, Happy Hills Nursing Home. Beverly uses this loan to pay off credit cards and consumer loans. Happy Hills considers Beverly to be a loyal employee and allows her up to 5 years to repay the loan. Beverly is not a shareholder or officer in Happy Hills. Happy Hills does not charge any interest on the loan. Both Happy Hills and Beverly are on a December 31 fiscal year end. What is the income tax issue for Happy Hills? You do not need to do any calculations.
What will be an ideal response?
At least one of the following should be discussed:
| • | Imputed interest rules |
| • | Below-market rate loans |
| • | Employment-related loans |
| • | Arm's-length transaction concept |
| • | The amount of imputed interest is compensation income to Beverly and deductible compensation expense for Happy Hills. |
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