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Columns: Tax Talk
George Saenz, CPA Expert: George Saenz, CPA
Tax Talk
Family lending is OK with Uncle Sam if you charge interest
Tax Talk

Tax implications of a family loan
 

Dear Tax Talk:
I am taking out a business loan with my dad. What should the interest rate be on the loan to avoid it being considered a gift?
--Brenda

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Dear Brenda,
Most dads don't demand that interest be paid, but your Uncle Sam does.

When a loan does not call for adequate interest, the law requires that the interest be imputed at the applicable federal rate (AFR). The AFR is an interest rate tied to Treasury bill rates and published by the IRS monthly. AFRs are published for short-, mid- and long-term loans, for loans maturing in three, nine or more years, respectively. A loan payable on demand is treated as a short-term borrowing. The rules generally do not apply to any loan that is $10,000 or less. Special rules apply to gift loans of less than $100,000, so that interest may not be imputed.

The AFR can be found on the IRS Web site by searching keyword AFR. Use the AFR for the month of the loan and the applicable compounding rate. The July short-term rate for annual compounding is 4.97 percent. If your loan with dad calls for an interest rate equal to or higher than that, there are no gift implications.

Bankrate.com's corrections policy-- Posted: Aug. 16, 2007
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