Tax
Imputed Interest
Interest the IRS treats as having been paid on below-market or no-interest loans, most often relevant to loans between businesses and owners or family members.
When you make a loan at below the Applicable Federal Rate (AFR) (published monthly by the IRS), the difference between the actual interest and the AFR is treated as imputed interest. The lender must report it as income and the borrower may have a corresponding deduction.
Most relevant to owner-to-business loans, family loans, and intercompany loans. A $500K owner loan at 0% from owner to S-corp generates imputed interest income for the owner and an imputed interest deduction for the business.
Exceptions exist for de minimis loans (under $10K, with limits) and certain gift loans (up to $100K with low-income borrowers).
Common pitfalls
- Treating owner-to-entity loans as 'just paperwork' and skipping the AFR analysis; the IRS catches this on audit
- Failing to document the loan with a promissory note, interest rate, and repayment schedule; without these, it's not a loan
- Forgetting that imputed interest can also create gift tax consequences in family loan scenarios
Related service
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