On Demand Webinar

Grappling with Imputed Interest Rules

Webinar Details$219

The tax law requires that imputed interest be calculated whenever a contact involving deferred payments or a below market loan fails to provide for interest at or above the applicable federal rate (“AFR”). In this course you will learn when these imputed interest rules apply, how to calculate the imputed interest amount, and what tax consequences flow from the application of these rules. 

Topics Covered:

Situations calling for imputed interest on sales or transfers of property

The original issue discount (“OID”) rules

The application of Code sections 483 and 1274

Calculation of imputed interest amounts 

Gift loans vs. compensation-related loans 

Reporting requirements related to imputed interest

Table of Contents    

  1. Introduction

  2. No Free Lunch 00:01:17

  3. Relevant Code Sections 0007:25

  4. Applicable Federal Rate (AFR) 00:13:34

  5. Relevant Code Sections 00:16:35

  6. Debt Given For Property: Code Section 1274 or 483 00:18:52

  7. Consequences of 1274 or 483 00:21:01

  8. Terminology 00:28:49

    1. Debt Instrument 00:28:49

    2. Property 00:31:35

    3. Stated Redemption Price 00:33:40

    4. Stated/Imputed Principal Amount 00:34:34

    5. Stated/Qualified Stated Interest 00:38:51

  9. Qualified Stated Interest 00:40:13

  10. Application of Code Section 1274 00:44:18

  11. Application of Code Section 1274 (cont.) 00:45:40

  12. Application of Code Section 1274 (cont.) 00:49:58

  13. Application of Code Section 483 00:51:38

  14. Application of Code Section 483 (cont.) 00:52:26

  15. When Neither 1274 nor 483 Applies 00:55:07

  16. When Neither 1274 nor 483 Applies 00:58:20

  17. Personal Use Property 01:00:56

  18. Lending Transactions Under 7872 01:02:57

  19. Consequence of Below Market Loan 01:06:31

  20. Example 1 01:12:42

  21. Example 2 01:15:25

  22. Character of Deemed Transfer 01:17:39

  23. Exceptions 01:22:56

  24. Methods for Allocating Interest 01:24:37

  25. OID and Constant Yield Method 01:27:16

  26. Determine Yield to Maturity 01:28:22

  27. Determine No. of Accrual Periods 01:30:28

  28. Allocate OID to Accrual Periods 01:30:53

  29. Allocate OID to Accrual Periods (cont.) 01:32:31

  30. Example: Year 1 00:32:51

  31. Example: Year 2 01:33:39

  32. Example: Year 3 01:34:06

  33. Example: Year 4 01:34:29

  34. Example: Year 5 01:34:36

  35. Imputed Interest Using OID Rules 01:36:57


Applicable Federal Rate (AFR) 00:03:52, 00:13:34

Constant Yield Method 01:25:24

Imputed Interest 00:03:55

Imputed Principal Amount 00:09:03

Imputed Principal Amount 00:34:34

Qualified Stated Interest 00:40:13

Ratable Accrual Method 01:25:50

Stated Principal Amount 00:34:34

Stated Redemption Price 00:33:40

Applicable Federal Rate (AFR): The applicable federal rate (AFR) is the minimum interest rate that the Internal Revenue Service (IRS) allows for private loans.

Below Market Loan: In general, a below-market loan is a loan on which no interest is charged or on which interest is charged at a rate below the applicable federal rate.

Constant Yield Method: The constant yield amount is calculated by multiplying the adjusted basis by the yield at issuance and then subtracting the coupon interest. This method is also known as the effective or scientific method of amortization.

Imputed Interest: Imputed Interest refers to interest that is considered by the IRS to have been paid for tax purposes, even if no interest payment was made.

Imputed Principal Amount: Imputed principal amount means the sum of the present values, as of the issue date, of all payments, including payments of stated interest, due under the debt instrument (determined by using a discount rate equal to the test rate of interest as determined under § 1.1274-4).

Original Issue Discount (OID): An original issue discount (OID) is the discount from par value at the time a bond or other debt instrument is issued; it is the difference between the stated redemption price at maturity and the actual issue price.

Qualified Stated Interest : Qualified stated interest is defined as the "stated interest that is unconditionally payable in cash or in property (other than debt instruments of the issuer), or that will be constructively received under section 451, at least annually at a single fixed rate".

Ratable Accrual Method: The ratable accrual method is a method for determining how much income was earned over a period of time and when within the period it was earned. The ratable accrual method can be used to compute the interest income for tax purposes.

Stated Principal Amount: The aggregate amount of all payments due under the debt instrument, excluding any amount of stated interest.

Stated Redemption Price: A debt instrument's stated redemption price at maturity is “the sum of all payments provided by the debt instrument other than qualified stated interest payments. If the payment schedule of a debt instrument is determined under § 1.1272-1(c) (relating to certain debt instruments subject to contingencies), that payment schedule is used to determine the instrument's stated redemption

Guest Speaker

Chuck Borek

Chuck Borek

Chuck Borek is a practicing attorney and founder of  the Borek Group, LLC. Chuck is also a CPA, and his background includes  five years as a partner in a public accounting firm. He received his law degree and MBA summa cum laude from the University of Baltimore in 1993, where he was editor-in-chief of the Law Review. He has been teaching professionally since 1989, including four years as an Associate Professor of Accounting and two years as a Visiting Assistant Professor of Law. He ha... View Full Profile