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?
Most dads don't demand that interest be paid, but your Uncle
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.