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AFR interest rates.

Congress put an end to interest-free loans between owners and their corporations in 1984 with the enactment of tax code section 7872. Since then, the IRS has been required to issue a monthly floating set of interest rates known as the applicable federal rate (AFR), providing minimum interest rates for both demand and term loans. Many owners of closely held businesses have fluctuating demand loans to or from their businesses and accordingly use the short-term or demand-loan rate that is specified by the IRS.

However, with interest rates at an all-time low, many owners could benefit by converting their open demand notes to long-term fixed debt instruments. Under section 7872, notes with a specific repayment term lock in the interest rate at the date the loan is made.

Observation: The long-term AFR rates, which apply to notes of over nine years in duration, have had AFR rates available in the low 7% range. Midterm notes (which are between three and nine years in term) have recently been in the low 6% vicinity.
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Title Annotation:applicable federal rate for interest-free loans between owners and their corporations
Publication:Journal of Accountancy
Article Type:Brief Article
Date:Apr 1, 1992
Words:172
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