Applicable Federal Rate AFR September 2012 What is the value of the AFR?

By Jeffrey Brooks, CPA, CFP, MBA for Jbrooks Wealth Advisors, PC, a Professional CPA and CFP Firm 602-687-9900 x101

What is the importance of the AFR? The applicable federal rates are published in several places, but I’ve found the easiest to use to be the “Index of Applicable Federal Rates (AFR) Rulings” available on the Internal Revenue Service Web site. The IRS releases a revenue ruling on the AFRs each month

Your tax accountant will have to provide the final word on this, but you should be able to use the applicable rates posted in either August or September for a loan made today. For a term loan, this rate would apply for the life of the loan. The applicable federal rate is determined by the length of the loan. Short-term loans have a final maturity of three years or less. Midterm loans are more than three years but less than nine years. Long-term loans have a final maturity of more than nine years.

It is possible to finesse the loan term issue by making the loan a demand loan, meaning the lender can call the loan on demand, versus a term loan. Talk to your tax adviser to determine if that’s in your best interest.

A client just asked me about a loan and gift. I told the client that although she was right about needing to pay at least the AFR to make sure she did not receive a gift of interest, the lender can choose to make a gift in the form of an interest subsidy up to the annual exclusion limits with no gift tax implications. The annual exclusion limit is $13,000 for 2012 and with spouses that use gift splitting the annual exclusion goes to $26,000. The other tax implication of the loan is one of federal income taxes due on the imputed interest payments.

There are important exceptions to the below-market interest rules. IRS publication 550, “Investment Income and Expenses,” has a whole section on below-market loans.

I hope all of this information has convinced you to work with your tax professional to structure the note so that the tax implications are understood, and managed, by both parties to the note. This isn’t a do-it-yourself project, and I can’t offer you tax or legal advice on the matter

Rev Rul 2012-24, 2012-36 IRB
The Applicable Federal Rates for September 2012 are reproduced below.

Table 1
Applicable Federal Rates (AFR) for September 2012
Period for Compounding
Annual Semiannual Quarterly Month
AFR .21% .21% .21% .21%
110% AFR .23% .23% .23% .23%
120% AFR .25% .25% .25% .25%
130% AFR .27% .27% .27% .27%
AFR .84% .84% .84% .84%
110% AFR .92% .92% .92% .92%
120% AFR 1.01% 1.01% 1.01% 1.01%
130% AFR 1.09% 1.09% 1.09% 1.09%
150% AFR 1.26% 1.26% 1.26% 1.26%
175% AFR 1.48% 1.47% 1.47% 1.47%
AFR 2.18% 2.17% 2.16% 2.16%
110% AFR 2.40% 2.39% 2.38% 2.38%
120% AFR 2.62% 2.60% 2.59% 2.59%
130% AFR 2.84% 2.82% 2.81% 2.80%

Table 2
Adjusted AFR for September 2012
Period for Compounding
Annual Semiannual Quarterly Monthly
adjusted AFR .23% .23% .23% .23%
adjusted AFR .95% .95% .95% .95%
adjusted AFR 2.80% 2.78% 2.77% 2.76%

Table 3
Rates Under Section 382 for September 2012
Adjusted federal long-term rate for the current month 2.80%
Long-term tax-exempt rate for ownership changes during the current
month (the highest of the adjusted federal long-term rates for the
current month and the prior two months) 3.02%

Table 4
Appropriate Percentages Under Section 42(b)(1)**
for September 2012
Appropriate percentage for the 70% present value low-income
housing credit 7.35%
Appropriate percentage for the 30% present value low-income
housing credit 3.15%

Table 5
Rate Under Section 7520 for September 2012
Applicable federal rate for determining the present value of an
annuity, an interest for life or a term of years, or a remainder or
reversionary interest 1.0%
**Note: Under Code Sec. 42(b)(1) , the applicable percentage for non-federally subsidized new buildings place in service after July 30, 2008, and before Dec. 31, 2013, is not to be less than 9%.

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About Jeffrey Brooks

Jeffrey Brooks, CPA, CFP, MBA since 1976 has specialized in helping clients save significant taxes, help businesses increase their cash flow, revenues and profits while increasing their control and satisfaction. Jeff and his accounting firm sincerely cares about the happiness of his clients.

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