To use the AFR to save money, you first have to know what it is.
AFR stands for Applicable Federal Rate, and it represents (especially for the last few years) a way for business owners to save a substantial amount of interest and, in some cases, a very inexpensive way to get money out of your incorporated business.
At one time or another, almost every business client carries a “Loan to” or “Loan from” the owners. Sometimes this can be a convenient way to withdraw some money from the business. In order to work and withstand IRS scrutiny, these loans must bear a “fair-market” rate of interest. Knowing that fair market value can be a nebulous term to define, IRS publishes safe-harbor rates each month. If these rates are used for Shareholder advances and/or loans, IRS will not challenge the transaction.
In the right situation (which we can help you determine), this can be a tax-advantaged way of pulling cash from your business.
The current carrying cost of this shareholder funding can be quite inexpensive.
To illustrate, here are the IRS safe harbor rates for February, 2016, for loans from or to your business:
- -Short-Term (demand loans and loans with terms of up to 3 years): 0.81%
- -Mid-Term (loans from 3-9 years): 1.82%
- -Long-Term (over 9 years): 2.62%
For those serious about tax planning, this link will give you the historical rates:
Remember that we’re just a click away when you need help.
He is also a founding Board Member and Finance Director of the Fayette Pregnancy Resource Center and serves on the Board of the National Equal Rights Institute.