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.
The Rule of 78 is a method of allocating interest throughout the life of a loan. It is also known as sum-of-the-years-digits. The name comes from the way interest is allocated during a one-year loan. The Rule of 78 weights the earlier payments with more interest than the later payments, so twelve parts of the interest are allocated during the first month, eleven parts during the second month, ten parts during the third month, and so forth. During an entire year, there are 12+11+10+…+1 parts allocated or a total of 78 parts. Hence the name “Rule of 78.”
An annuity is an investment that provides a series of payments in exchange for an initial lump-sum payment. If you want to evaluate an annuity, you can start with how much you want to invest or you can start with how much you want in future payments to find out how much to invest today. The other factors to consider are how often the withdrawals occur and what would be your average annual return.
With this information you can do “what if” calculations to find the right combination of investment and return that will work for you. TValue software is an excellent tool to do these “what ifs”. For this exercise, we are going to look at a deferred annuity with a onetime payment. We will do two example cases: one determining a term and the other determining an investment.
This is a call our Support team gets often. A customer is trying to reconcile their Excel worksheet to their amortization schedule in TValue and they ask “Why doesn’t TValue agree with my Excel schedule?”
The answer is usually that the formula’s methodology in Excel needs to be replicated in TValue so we have the same calculation basis to get the same numbers. This would be step one. Once this is resolved and if there are differences, it is often the formulas in Excel that are the issue as the user has copied and pasted, written an incorrect formula, or has inconsistent dates in Excel versus TValue. Generally, we find that TValue calculates the correct schedule 100% of the time with the same assumptions.
The imputed interest rate is an unstated interest rate and it can cover many different scenarios. To calculate an imputed interest rate, you need to input the actual cash flows and then you can solve for the interest rate.