Your grandson needs a car, but cannot afford the payments. As a favor, you provide the $25,000 to purchase the car. You tell your grandson to pay you back when he can, but there is no loan document. The IRS sees this payment during an audit and asks you where your interest income is for this loan. Should this happen, you will quickly understand the meaning of AFRs.
Each month the IRS publishes a series of tables known as AFRs. So what are they and why should you care?
AFRs stand for Applicable Federal Rates. They are minimum interest rates that the IRS applies to a transaction when no rate is stated or implied. In other words, you may have a transaction that the IRS believes has an interest income/expense element to it, but none has been claimed by the taxpayer. These minimum interest rates are published each month by the IRS for three loan terms; short-term (0 – 3 years), mid-term (4 to 9 years) and long-term (over 9 years).
You may think that money you gave to a friend or that car sale to your cousin with repayment over time has no interest rate, but the IRS often sees it differently. So if no interest rate is stated, the IRS will apply the applicable AFR and you could be in for a tax surprise. Here are some common examples when the AFR rates can come into play:
Should you wish to see the published AFR rates, they are available on the IRS website at www.irs.gov.
As always, should you have any questions or concerns regarding your situation please feel free to call.
DiSabatino CPA
651 Via Alondra, Suite 715
Camarillo, CA 93012
Phone: 805-389-7300