Chin, a cash basis taxpayer, borrows $25,000 on a 2-year loan from State Bank to purchase business equipment. Under the terms of the loan, State Bank deducts $4,500 in interest on the loan and gives Chin the $20,500 net proceeds. Chin will repay State Bank $25,000 in 2 years.

Identify the tax issue(s) posed by the facts presented. Determine the possible tax consequences of each issue that you identify.