SR Glossary: Below Market Loans
In the course of running a smaller company there comes times where the owner(s) may need to loan the company money. What is usually lost in this whole transaction are the details: How is it going to be repaid? When is it going to be repaid? And (just as important to the conversation) What interest rate is going to be charged? (Definition: these types of loans are usually called “demand loans” because they are due upon demand)
When there is no interest on the loan or it is significantly below a “normal interest rate”, the IRS considered it a “Below Market Rate” loan. The IRS feels that these types of loans should be similar to funds borrowed from financial institutions. If you have a below market loan, the IRS will contend that interest should be imputed. The IRS has a method for imputing interest utilizing AFR interest rates.
This is a very big issue with the IRS. Rather than getting into a long discussion on the computation of AFR, it would be much easier for you to contact your accountant at ShindelRock to assist you. You also might contact us before you make a loan to the company so that we can advise you on how to set the loan up to avoid some of these issues.