I made the following imputed interest income flow chart last fall, while taking the tax course that is required for my master’s degree. It wasn’t in the textbook.
Imputed interest might need to be recognized in gift loan situations. These situations occur when a loan is made out of love (such as between family members or friends), a loan to an employee, a loan to a shareholder, or a loan to avoid taxes. It is not an interest-free loan if it is over certain amounts or used for certain purposes. Interest is assigned to the loan and must be recognized as income by the lender.
This flow chart shows how to determine if the lender needs to recognize any interest income on the tax return. If the lender recognizes imputed interest income, then the borrower will recognize an imputed interest expense for tax purposes.
As I have mentioned before, the current CPA exam is testing on pre-Trump tax law changes. The exam is changing as of January 1, 2019, to reflect those changes. I do not know if the Trump tax law changes will impact imputed interest income or how it is determined for tax purposes. If they do, I will post an update.