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07.07.2022 - 19:43

What is the purpose of the below-market loan rules in the tax code?

Question:

What is the purpose of the below-market loan rules in the tax code?

Answers (1)

Raquel April 4, 2023 в 12:10

The below-market loan rules in the tax code are designed to prevent taxpayers from avoiding taxes by providing loans to family members or related parties at artificially low interest rates. These rules require the lender to impute interest income based on the applicable federal rate (AFR) rather than the actual interest rate charged. The AFR is set by the IRS and represents the minimum interest rate that should be charged on a loan to avoid gift tax implications.
For example, if a wealthy individual lends money to a family member at a 0% interest rate, the below-market loan rules would require the lender to report imputed interest income based on the AFR. This ensures that the lender pays taxes on the appropriate amount of interest income they would have earned if they had charged the AFR.
The purpose of these rules is to prevent taxpayers from using below-market loans as a tax avoidance strategy. By requiring taxpayers to report imputed interest income, the rules ensure that lenders pay taxes on the appropriate amount of interest income they would have earned if they had charged a market interest rate.

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