Interest income from a promissory note typically must be included as taxable income for the year it was received. Although the reporting obligation exists, not all promissory note income is reported to the IRS.
Interest income typically is reported to the IRS using IRS Form 1099-INT, Interest Income. Form 1099-INT reports the value of taxable interest income, any nontaxable interest income and any federal withholding. A copy of Form 1099-INT is sent by the interest payer to both the payee and to the IRS. The form lists the name, address and Social Security number of the payee, which allows the IRS to match the interest income with the recipient's income tax return.
Exceptions to Reporting
Two major exceptions to the filing of Form 1099-INT exist. The first is a de minimus exception. Taxpayers who paid less than $10 in interest to a payee do not have to file a Form 1099-INT for that payee. The second exception is for nontrade or nonbusiness transactions. If the interest is paid outside the active conduct of a trade or business, the payer does not need to report the interest to the IRS on Form 1099-INT. In effect, this exempts interest earned on all private promissory notes from this reporting requirement.
Promissory Notes to Individuals
As a result of the Form 1099-INT reporting requirements, promissory notes for loans to formal business entities generally result in the interest from the loans being reported to the IRS, while the interest from promissory notes for loans to individuals typically is not. To help ensure that interest on personal loans is reported as income by the lender, the IRS may disallow certain interest expense deductions of the borrower -- such as student loan interest or investment interest -- if the lender did not report the corresponding payment of interest as income.
Regardless of whether the interest was reported on Form 1099-INT, interest income from promissory notes always must be reported by individual income taxpayers to the IRS on Schedule B of Form 1040. On this schedule, taxpayers total the aggregate amount of interest and ordinary dividends from all sources. This aggregate value is then reported on page one of the taxpayer's Form 1040, where it is added to the amount of the taxpayer's gross income.
Michael Dreiser started writing professionally in 2010. He is a certified public accountant with experience working for a large New York City accountancy and expertise in areas ranging from private equity taxation to investment management. He holds a Master of Business Administration in international finance from l’École Nationale des Ponts et Chaussées in Paris.