Applicable Federal Rate


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Applicable Federal Rate

The interest rate the IRS assumes when it calculates imputed interest. Imputed interest is interest that is assigned to an investment for tax purposes even when no interest has been paid. Thus, one pays taxes on the applicable federal rate. It is published by the U.S. Treasury.
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For term loans, the applicable federal rate is the corresponding federal rate (i.e., short-, mid-, or long-term) in effect on the day the loan was made, compounded semiannually.
By comparison, a loan at the applicable federal rate (which presumably is close to the actual market rate) would have cost Flint $6,000 in year 1.
The appropriate applicable federal rate (AFR) is based upon the original term of the loan (short-term for loans of 3 years or less, mid-term for loans between 3 and 9 years, and long-term for loans greater than 9 years).
The value of a payment that is not required to be made within a reasonable period equals the entire principal balance only if the obligation has an interest rate that is equal to or greater than the applicable federal rate under Section 1274(d).
If the amount of debt does not exceed $5,115,100 (as adjusted in 2010 for inflation) and the installment sale does not provide for a minimum interest rate equal to the "applicable federal rate," the IRS will generally impute an interest rate at the lower of the applicable federal rate or 9 percent, compounded semiannually.
The applicable federal rate (see Q 1409) for demand loans is the short-term rate in effect during the period for which the forgone interest is being determined, compounded semiannually.
Note that where there is an interest rate reduction outside the original debt instrument, DOI income will not result as long as the new interest rate is at least equal to or greater than the applicable federal rate.
Under the loan regime, the interest cost is based on the applicable federal rate or AFR.
Excess interest is defined as any interest credited to the nonqualified plan greater than 120% of the longterm applicable federal rate
If the earnings credited to an employee's account exceed whichever of these amounts is applicable, the employee will be taxed on wages equal to the excess of the amount credited to the account over the amount that would be determined using the mid-term applicable federal rate (AFR) for January 1 of the year.
Since these funds are loaned to the trust and not gifted, (1) the Diedrichs will incur no gift taxation on the transfer and (2) the trust will be required to pay annual interest to the Diedrichs on the note at the prevailing long term applicable federal rate (AFR).
If an executive loan fails to provide for adequate interest (i.e., equal to the applicable Federal rate (AFR), payable at least annually), the company is deemed to transfer additional compensation (or dividends, if the executive is a shareholder) equaling the forgone loan interest for the period the loan is outstanding.