(Current through December 2016)
Under section 7872 of the Internal Revenue Code, there is interest imputed to “below market loans” between family members, employers and employees, corporations and shareholders, and in other situations. For a loan payable on demand, the short-term applicable federal rate would apply for the purpose of calculating any foregone interest, and because that rate can change monthly, the calculation of interest would have to be month-by-month, with monthly compounding of accrued interest.
To simplify calculations of interest for demand loans, I.R.C. section 7872(e)(2) allows the use of a “blended annual rate” for demand loans with a fixed principal amount outstanding for an entire calendar year. According to Rev. Rul. 86-17, 1986-1 C.B. 377, the blended annual rate is the product of (a) one half of the January semiannual short-term applicable federal rate times (b) one half of the July semiannual short-term applicable federal rate. (The actual formula is (1+a/2)*(1+b/2)-1, where “a” is the January rate and “b” is the July rate.) This blended annual rate is published by the Internal Revenue Service in a Revenue Ruling every June, based on the relevant rates for January and July of that year.
The following is a chart of the blended annual rates from 1985 to the present. For the interest rates to apply to low-interest (or interest-free) demand loans before 1985, see Rev. Proc. 85-46, 1985-2 C.B. 507.
— Blended Annual Rates Under Section 7872 —
|Calendar Year||Blended Annual Rate|