imputed interest

Imputed interest

Used in accounting to refer to interest that has effectively been paid to a bondholder, even though no money has actually been paid.

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imputed interest

Interest on an investment that is assumed for certain purposes to be paid even though no interest payment is physically received by the investor. For example, the Internal Revenue Service considers annual accretion on a zero-coupon corporate or a zero-coupon Treasury bond to be imputed interest for tax purposes even though investors holding these bonds receive no annual interest payments from the issuers.

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Imputed interest. Imputed interest is interest you are assumed to have collected even if that interest was not paid.

For example, you pay income tax on the imputed interest of a zero-coupon bond you hold in a taxable account even though the interest is not paid until the bond matures.

Similarly, you may be required to pay income tax on imputed interest if you make an interest-free loan, even if that loan is to your children or another member of your family. The government's position, in this case, is that you should have charged interest even though you didn't do so.

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imputed interest

A common term for the IRS expression “unstated interest”or sometimes “original issue discount.”It applies to the situation in which a promissory note calls for no interest or insufficient interest under the circumstances.In an audit,the IRS will calculate an interest rate,impute that to the transaction, and declare each year's imputed interest as additional income to the lender, on which the lender must pay income taxes, penalties, and interest. (The rules are found at 26 U.S.C. §1273,1274 and 483.)

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Imputed Interest (Unstated Interest)

In the case of certain long-term sales of property, the IRS has the authority to convert some of the gain from the sale into interest income if the contract does not provide for a minimum rate of interest to be paid by the purchaser. Such converted interest is called imputed interest.