Interest income is the compensation a party earns for letting someone else use its money. A lender earns it on a loan, a depositor on a bank account, a bondholder on a bond, and a note holder on a promissory note, measured on the amount outstanding at the rate and for the time the arrangement sets. It belongs to whoever supplied the funds, and the same charge is interest expense to whoever used them.
Federal tax law puts it in gross income by default. Interest received by or credited to the taxpayer constitutes gross income and is fully taxable, and interest income includes interest on savings or other bank deposits, on coupon bonds, on an open account, a promissory note, a mortgage, or a corporate bond or debenture, and interest on refunds of Federal taxes (26 CFR 1.61-7(a)). The statute behind that regulation gives interest its own place: gross income means all income from whatever source derived, including but not limited to the items listed, and interest is item (4) on that list (26 U.S.C. 61(a)(4)). One subset of it is excluded from gross income by a different section and reported on its own line, and that subset is the subject of tax-exempt interest income.
How the Amount Is Computed
Interest income for a period is the principal outstanding, multiplied by the stated rate, multiplied by the fraction of the rate period the principal was outstanding. Principal is the amount owed that interest is charged on. The stated rate is the annual rate the note or the deposit agreement names.
Say a firm holds a client note at a fixed principal and a stated annual rate, and the note is outstanding for part of the reporting year.
Principal outstanding 250,000
Stated annual rate 6%
Fraction of the year outstanding 4/12
Interest income 250,000 x 6% x 4/12 5,000Two things bend that arithmetic in practice. The stated rate is not always the rate the arrangement actually produces, and the gap between the two is worked through in effective interest rate formula. The fraction itself comes from a day-count convention rather than the calendar, and that question, along with the entry a close makes for interest earned but not yet received, belongs to accrued interest. On accrual books the income is recognized as it is earned, so the cash date and the recognition date often fall in different periods.
Where It Shows Up in a Firm’s Work
The Payer Files Form 1099-INT
The information return is the payer’s duty, not the recipient’s. File Form 1099-INT, Interest Income, for each person to whom you paid amounts reportable in boxes 1, 3, or 8 of at least $10, or at least $600 of interest paid in the course of your trade or business (IRS, Instructions for Forms 1099-INT and 1099-OID). Box 1 is the general one, and its instruction is to enter taxable interest not included in box 3, the box for interest on U.S. savings bonds and Treasury obligations, while box 8 carries tax-exempt interest (IRS, Instructions for Forms 1099-INT and 1099-OID).
Those floors decide when a payer has to file on amount alone. A payer that withheld and paid foreign tax on the interest, or that withheld and did not refund federal income tax under the backup withholding rules, files regardless of the amount (IRS, Instructions for Forms 1099-INT and 1099-OID). None of it decides what a recipient has earned. Taxable interest generally should be shown on Forms 1099-INT, Forms 1099-OID or substitute statements, and the recipient’s instruction is still to report all of it (IRS, Instructions for Schedule B (Form 1040) (2025)). A client paid less than the filing floor, who never receives a form, still has interest income.
The Recipient Reports It on the Return
An individual reports the total at line 2b of Form 1040, taxable interest, with tax-exempt interest entered beside it at line 2a on the same line of the form, so the two are never merged. The instruction printed beside those lines is to attach Schedule B if required (IRS, Form 1040 (2025)).
Schedule B is required more often than the dollar test alone suggests. The familiar trigger is that you had over $1,500 of taxable interest or ordinary dividends. Several others apply at any amount. Interest from a seller-financed mortgage, where the buyer used the property as a personal residence, is listed first, with the buyer’s name, address and social security number. Accrued interest from a bond sends a return there on its own, as does the exclusion for interest on series EE or I U.S. savings bonds issued after 1989, and so does interest received as a nominee, which is reported in full and then subtracted (IRS, Instructions for Schedule B (Form 1040) (2025)).
The Line on the Income Statement
For a company that is not a financial institution, interest is incidental to what the business sells, so it is presented outside operating revenue. On the caption list the SEC prescribes for commercial and industrial registrants, amounts earned from interest on securities are stated separately under caption 7, non-operating income (17 CFR 210.5-03), a caption that governs statements filed with the Commission rather than every set of books. A multi-step presentation puts the same item below the operating income subtotal, where that format is set out in multi-step income statement, and the full caption list is in income statement.
For a bank or a credit union the line is not incidental at all, because interest income less interest expense is reported as net interest income.
What Interest Income Is Not
Interest Expense
Interest income and interest expense are one charge seen from opposite sides of the same arrangement. The party that supplied the money records income, and the party that used it records expense, so a single loan produces both in two different sets of books. On the paying side the charge is not always an expense, because interest attached to the cost of an asset under construction is added to that asset instead, which is the subject of capitalized interest.
A Dividend
Interest compensates for the use of money under a debt arrangement. A dividend distributes profit to an owner. The Code keeps them apart as separate items of gross income, interest at 61(a)(4) and dividends at 61(a)(7) (26 U.S.C. 61(a)).
Common Questions
You have it whenever a payer paid or credited you an amount for the use of your money. Interest received by or credited to the taxpayer constitutes gross income, so a savings balance that grows without a withdrawal counts the same as a check that arrives (26 CFR 1.61-7(a)). A payer sends Form 1099-INT once the amounts it paid you reach the filing floors, and it files regardless of amount where it withheld and paid foreign tax on the interest, or withheld and did not refund federal income tax under the backup withholding rules (IRS, Instructions for Forms 1099-INT and 1099-OID), so the form is evidence that you have interest income rather than the test for whether you do.
Box 1 and box 3 amounts are taxable interest, which reaches line 2b of Form 1040, and box 8 is tax-exempt interest at line 2a (IRS, Form 1040 (2025)). Where a Schedule B trigger applies, each payer is listed there by name with its amount, and the total carries across to the return (IRS, Instructions for Schedule B (Form 1040) (2025)).
None of it by size alone. The $10 and $600 figures on Form 1099-INT are filing floors for the payer, not exemptions for the recipient (IRS, Instructions for Forms 1099-INT and 1099-OID). What removes interest from gross income is the obligation behind it, and that test is in tax-exempt interest income.
Accountably places trained offshore accountants and tax preparers inside US CPA and EA firms, so interest schedules and information-return entries are prepared and reviewed before they reach the partner who signs.
