Davew9128 is correct. The tax law imputes interest in the case of loans made that are below market, though the rules do not apply if the total loans you make to another individual are $10,000 or less. I'll provide the same explanation of the rule I gave the OP on another forum for the benefit of readers here:
This is a below market loan to which the rules of the Internal Revenue Code (IRC) § 7872 apply. That section details the treatment of below market loans. You made the loan to your brother interest free, with the result that the foregone interest you otherwise would have gotten is a gift to him. Under § 7872, that means that interest is computed at the applicable federal rate (AFR) and that amount of interest is treated as (1) a gift you made to your brother and then (2) your brother then pays you that same amount in interest. That interest you are deemed to receive is known as imputed interest.
Assuming that your total gifts to your brother, including this imputed gift, do not total more than $15,000 for the year you won't have any gift tax issues to worry about. However, pay attention to the other gifts you make to him during the year because if the total of all the gifts combined exceed $15,000 you will have to file a gift tax return and reduce you lifetime unified credit against gift and estate taxes or, if you've exhausted that credit, you'll have gift tax to pay.
The imputed interest is included in your income like any other interest you receive. However, so long as the total loans between you and your brother are less than $100,000, the interest income you have will be limited to no more than your net investment income for the year.
You aren't going to be able to avoid the application of these rules.
Arizona residents compute their state income tax the same way they do for federal income tax, with a few adjustments that do not impact this.