Parents lend $2,000,000 to their child to start a business. The loan is interest-free and is payable on demand. The imputed interest is subject to

The imputed interest is subject to the gift tax for each year that the loan is outstanding.

Explanation:

Imputed interest is a type of interest often considered by the Internal Revenue Service for the purpose of tax. It is usually an interest on loans that have no interest charges a or where the interest on the loan is very low. The most common examples are the; loan exchange between friends and family. Let's say a parent lends his son a loan of $100,000 that has no interest. Assuming the federal rate that is applicable for that loan amount is 2%. This means the interest amount that the son should be paying his parent should be expressed as;

Interest amount=2% of 100,000 = (2/100) * 100,000=$2,000

The parent should be paid $2,000 in interest every year. But since the loan is interest-free the parent is not paid, however this interest amount is included in the parent's tax return as income. That's why it is defined as imputed.

Generally, according to the United States tax laws, imputed interest is implied when the loan amount exceeds $10,000. This means that any interest free loan amount above $10,000 is liable to a tax rate, while any interest free loan amount below $10,000 has no tax liability. This tax is called a gift tax. In our case, the imputed interest is subject to the gift tax for each year that the loan is outstanding.