re: how can I justly avoid paying taxes on this?

I'm not Poodlebrain, but the first question I'd ask is how frequently you get audited. Some small businesses do but if you're the average Joe it'll never happen and this isn't worth worrying about.

I'd be more worried about your friend. He is paying you via company check and therefore is probably writing off the loan as a business expense. And that's assuming he is a sole proprietor, if he isn't then he's cheating the other owners on top of that.