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 [1] to assist you. You also might contact us [1] 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.