What is true about imputed interest between a lender and borrower?

Imputed interest is a concept under which the IRS assumes that interest is charged on certain loans, even if no formal interest rate is specified in the loan agreement. This applies when the loan is made interest-free or at a lower-than-market interest rate.

In this context, the statement that the lender must impute interest but receives no deduction is accurate. The reason for this is that the IRS requires lenders to recognize an amount of interest received based on applicable federal rates, which means that for tax purposes, the lender must report this imputed interest as income even if no actual cash interest was received. However, the lender does not receive a tax deduction for this imputed interest because it was not actually paid out.

Thus, while the borrower may be treated as receiving a tax benefit from having a lower-than-market interest rate, the lender's obligation to account for this imputed interest does not provide them with a corresponding deduction. This illustrates how imputed interest works within tax law and highlights the unique tax implications for both parties involved in the loan.