5 Recent Tax Changes That Make Informal Loans Less ‘Informal’ Under IRS Rules

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A handshake used to seal plenty of deals. Now, the IRS wants paperwork, interest calculations, and in some cases, formal reporting to back it up. Plenty of families and small business owners rely on informal loans. A parent fronts money for a down payment. A friend helps launch a startup. A sibling bridges a cash crunch.

Those transactions may feel personal, but federal tax law does not treat them as casual favors. Over the past few years, several tax changes and enforcement shifts have made it clear that informal loans face tighter scrutiny and clearer reporting expectations.

1. Higher AFR Rates Turn “Interest-Free” Into Taxable Income

Every month, the Internal Revenue Service publishes Applicable Federal Rates, known as AFRs. These rates matter whenever someone lends money below market interest. For years, AFRs hovered at historically low levels. That environment made it easier to lend money to family members at zero or near-zero interest without triggering major tax consequences.

That landscape shifted dramatically when interest rates climbed beginning in 2022. As the Federal Reserve raised rates to combat inflation, AFRs rose alongside them. A loan that once generated minimal “imputed interest” now produces a much larger taxable amount. If a lender charges no interest or charges less than the AFR, the IRS treats the difference as if the lender earned that interest anyway.

That phantom interest counts as taxable income to the lender. In some cases, the IRS also treats the unpaid interest as a gift to the borrower, which can chip away at the lender’s lifetime gift and estate tax exemption. Anyone extending a private loan today needs to check the current AFR and structure the loan accordingly. A written agreement that sets interest at or above the applicable rate protects both sides and avoids unpleasant surprises at tax time.

2. Gift Tax Limits and Lifetime Exemptions Stay in the Spotlight

The annual gift tax exclusion allows individuals to give a set amount per recipient each year without filing a gift tax return. That exclusion stands at $19,000 per recipient. The lifetime gift and estate tax exemption remains historically high, but lawmakers have scheduled it to drop unless Congress acts.

Those numbers matter when informal loans blur into partial gifts. If a lender charges no interest on a sizable loan, the IRS can treat the foregone interest as a gift each year. If the loan never gets repaid and the lender forgives it, that forgiven balance also becomes a gift.

Recent focus on estate planning, combined with the looming sunset of higher exemption amounts, pushes more families to document loans carefully. A properly structured promissory note with clear repayment terms reduces confusion about whether a transfer counts as a loan or a gift. Without that documentation, the IRS may reclassify the transaction, which can complicate estate plans and trigger reporting requirements that nobody anticipated.

3. 1099-K Reporting Expands Digital Paper Trails

Payment apps and online platforms changed how people move money. Venmo, PayPal, Cash App, and similar services make it effortless to transfer funds. Lawmakers took notice. Changes under the American Rescue Plan lowered the reporting threshold for Form 1099-K, which payment platforms use to report certain transactions to the IRS.

After the passage of the One Big Beautiful Bill in 2025, the 1099-K reporting threshold has returned to $20,000 in payments and at least 200 transactions for the 2025 tax year and beyond. In a sense, there was a change, but then it was changed back, which might seem confusing to taxpayers.

Regardless of the threshold, borrowers and lenders now need to keep detailed records that show the nature of each transfer. A memo line that says “loan” helps, but it does not replace a formal agreement. If the IRS matches a 1099-K to a tax return and sees no explanation, questions may follow. Clean documentation and consistent reporting reduce the risk that a private loan gets mistaken for taxable income.

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4. Business Loans to Owners Face Sharper Scrutiny

Small business owners often treat their companies like extensions of themselves. An owner might lend money to the business during a slow season or take a temporary loan from company funds. Tax law draws a hard line between personal and business finances, and the IRS enforces that line with increasing focus.

Recent enforcement efforts emphasize proper classification of shareholder loans, especially in closely held corporations and S corporations. If a business advances money to an owner without clear repayment terms or charges no interest, the IRS may reclassify that advance as a distribution. That reclassification can create unexpected taxable income.

On the flip side, when an owner lends money to a business, the owner must report interest income if the business pays interest. If no interest gets charged, imputed interest rules can still apply. A written promissory note, a defined interest rate that meets AFR standards, and a realistic repayment schedule show that the transaction represents a true loan. Sloppy bookkeeping invites the IRS to draw its own conclusions, and those conclusions rarely favor the taxpayer.

5. Estate and Intra-Family Loans Receive Fresh Attention

High-net-worth families often use intra-family loans as estate planning tools. A parent might lend money to a child to buy a home or invest in a business, locking in a low interest rate and allowing future appreciation to occur outside the parent’s estate. Rising AFRs and closer scrutiny of valuation strategies have shifted the math.

When AFRs rise, the cost of structuring a compliant intra-family loan rises too. That change affects the potential estate tax benefits of the strategy. At the same time, the IRS continues to examine estate planning techniques that rely on undervalued notes or unrealistic repayment terms.

Families who want to use loans as part of their long-term planning need to treat them like real financial instruments. That means setting a clear term, documenting collateral when appropriate, and enforcing payments. If a borrower skips payments year after year with no consequences, the IRS may argue that the loan never qualified as bona fide debt. A tax professional can model different interest rate scenarios and help structure the arrangement so it stands up under review.

Normal No Longer Means Invisible

The tax code never truly ignored private loans, but recent rate changes, reporting expansions, and enforcement priorities make that reality impossible to overlook. Higher AFRs increase the tax cost of interest-free loans. 1099-K reporting leaves digital footprints. Gift tax rules and estate planning shifts raise the stakes for large transfers within families and closely held businesses.

Anyone considering a private loan should start with three steps. Draft a written note that outlines the principal amount, interest rate, repayment schedule, and consequences for default. Check the current AFR to ensure the interest rate meets federal standards. Keep detailed records of every payment, including dates and amounts, and report interest income when required.

Does this extra paperwork feel worth it for the peace of mind that comes with knowing the IRS will not reinterpret a generous gesture as a taxable mistake? Share your loan stories in the comments below.