Question

Malik's grandfather has loaned him $110,000 toward opening a restaurant and has told Malik that the loan is interest-free. Why might this be a problem?

The loan is for too much money.

Malik shouldn't borrow money from his relatives.

The IRS requires that all loans for more than $100,000 be at market-rate interest.

The IRS will charge Malik a transaction fee.

Answer 1

Malik's interest-free loan from his grandfather can be problematic due to potential tax implications and a lack of financial motivation.

Step-by-step explanation:

Malik's grandfather loaning him $110,000 interest-free can be problematic because the IRS requires loans for more than $100,000 to have market-rate interest. Since the loan does not have any interest, it might be considered a gift by the IRS, which could have tax implications for both Malik and his grandfather. Additionally, if Malik were to use the loan to open a business, not having to pay interest could mean that he has less incentive to generate enough profit to repay the loan, potentially affecting his motivation and the financial sustainability of the restaurant.