How do you calculate imputed interest on below-market loans?

The imputed interest for the year on zero-coupon bonds is estimated as the accrued interest rather than the minimum interest like in below-market loans. It is calculated as the yield to maturity (YTM) multiplied by the present value of the bond.

What is the AFR for demand loans?

The AFR is the minimum rate you can charge without creating tax side effects. Every month the IRS publishes AFR’s. The AFR for a loan is the interest rate for loans of that duration in the month the loan is made. For example, suppose a $300,000 interest-only demand loan is made in September 2011.

What is the AFR rate for a demand note?

— Blended Annual Rates Under Section 7872 —

Calendar Year Blended Annual Rate
2018 2.03%
2019 2.42%
2020 0.89%
2021 0.13%

What is the imputed interest rate for 2020?

The Section 7520 interest rate for December 2020 is 0.6 percent.

What are below-market interest rates?

A below-market interest rate (BMIR) is a rate that is below the prevailing commercial bank interest rate in effect at that time. Loans given under BMIR terms involve an interest rate below the applicable federal rate or may even involve no interest rate.

What is the minimum interest rate for a family loan 2021?

Preservation | Family Wealth Protection & Planning AFRs are published monthly and represent the minimum interest rates that should be charged for family loans to avoid tax complications. The Section 7520 interest rate for January 2021 is 0.6 percent.

What is a below market loan?

A below-market loan is a loan where the interest rate charged is lower than the current applicable federal rate (AFR). Simplified, foregone interest is the amount of interest that would be payable if interest accrued on the loan at the applicable federal rate, less any interest actually paid.

How is interest calculated on AFR?

Multiply the AFR by the outstanding principal balance of the note. This is the annual imputed interest on the loan. This step must be repeated based on the compounding frequency of the note. For example, it is performed once annually for an annually compounding note and 12 times annually for a monthly compounding note.