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
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