Your title bothers me. There is no Income, from debt. There are Proceeds of that loan, but that is cash flow and not income. Imagine borrowing for your home mortgage and having to call that Income and report it as Income and pay taxes on it as if that is Income.

Borrowing is not a business model. Your taxpayer has no business activity. Trying to call it business debt makes no sense. And now you would be incurring self-employment taxes on either what you called the income (which really is the proceeds) or the interest earned.

I hope that helps you see how none of this makes sense. And don't let people mislead you into reporting something as business when it clearly is not. The next thing you know, they will be justifying their RV purchase and their Spotify subscription and even their jewelry and nanny as "business" expense.

"client borrowed money from bank with extremely low interest and turn around invested in treasury bills and CDs."

If playing the float really worked like that, then everyone would be doing it. They seem to be overlooking taxes on their earnings.