Original Issue Discount refers to the excess of an obligation’s stated redemption price at maturity over its issue price, and it is taxable as interest over the life of the obligation on a year-by-year basis. It is effectively interest income. Those debt instruments that may have OID include zero coupon bonds, debentures, notes, certificates, or other evidence of indebtedness having a term of more than one year.
In 1984, the Tax Reform Act set provisions for applicable federal rates (AFRs). This is a minimum tax rate that must be charged on all loans, including personal loans. The IRS provides various prescribed rates for federal income tax purposes each month and TimeValue Software offers them on our website at Applicable Federal Rates | TimeValue Software.
There is a federal mandate for a business to charge interest on loans to or from its owners or for other related party loans. Sec. 7872 was enacted as part of the Tax Act of 1984. This Code section required loans between certain related parties, usually in excess of $10,000, to bear a minimum amount of interest based on the applicable federal rates (AFRs). With short-term rates well under 1%, the resulting amounts of self-charged interest can seem negligible but should be done.
One of our customers made this comment “How can I create a cash basis amortization schedule on an EIDL? Firm received EIDL loan and did not make payments for the past year. Under cash basis rules, I believe 100% of the first payments will be interest until the back interest is paid. Thank you, you'll have a lot of EIDL questions in the future. Consider making a blog post guide on how to run the calcs.”
The Government Accounting Standards Board (GASB) issued Statement No. 87, Leases. This replaces the previous lease accounting methodology and establishes a single model for lease accounting based on the foundational principle that leases are a financing of the right to use (RTU) an underlying asset. Following are highlights from GASB Statement No. 87 – Leases (ca.gov).