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TimeValue Software Blog

Original Issue Discount (OID)

By Martel Pellerin

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.

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Imputed Interest using the Applicable Federal Rates (AFRs)

By Martel Pellerin

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.

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Calculating Imputed Interest for Related Party Loans

By Martel Pellerin

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.

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Imputed Interest Rate

By Martel Pellerin

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.

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Simple Interest versus Compound Interest on an Investment

By Martel Pellerin

The magic of compounding can work to your advantage when it comes to your investments and can be a potent factor in wealth creation. While simple and compound interest are basic financial concepts, becoming thoroughly familiar with them will help you make better decisions when taking out a loan or making an investment, which may save you thousands of dollars over the long term.  When investing, compounding is critical. You'll start earning interest on your initial deposit and you'll earn interest on the interest you just earned.

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