I'm currently negotiating an IOI for a business in which the seller note would be on partial standby (e.g., non-cash interest will accrue and no amortization payments will be made for the first three years of the term). From the seller's perspective, would they recognize the non-cash PIK interest that accrues during the first three years as income on their personal tax returns and need to pay tax on the amounts? Or would they only need to start paying taxes on interest income once the standby period ends and they start receiving cash from the loan?
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