An Interest-Free Loan From Your Own Corporation Isn't Really Free
When a corporation lends money to a shareholder โ or a shareholder lends to their corporation โ at no interest or below the IRS Applicable Federal Rate (AFR), the tax code doesn't let that slide. The IRS treats the loan as if interest was actually charged at the AFR, and taxes that "imputed interest" as income even though no cash changed hands. For a corporate loan to a shareholder, that phantom interest income adds to the corporation's taxable income at the flat 21% federal rate, and depending on the loan's structure, it may also be treated as a deemed dividend or compensation to the shareholder โ adding a second layer of tax. The larger the balance and the longer the loan sits unpaid, the more this quietly compounds.
How It's Calculated
| Step | Item | Detail |
|---|---|---|
| 1 | Imputed interest | Loan balance ร AFR ร (months รท 12) |
| 2 | Deemed interest income | Treated as taxable income to the corporation |
| 3 | Added corporate tax | Imputed interest ร 21% flat federal rate |
| 4 | Shareholder-level tax | Possible deemed dividend or compensation, not included |
This calculator only estimates the corporate-level tax on the imputed interest. It does not include the shareholder's personal tax on a deemed dividend or compensation, or any state tax, both of which can add meaningfully to the total. Check the current month's published AFR and consult a tax professional before relying on these numbers.
Frequently Asked Questions
The minimum rate the IRS allows on related-party loans without triggering imputed interest rules. The IRS publishes new short-, mid-, and long-term AFRs monthly.
The shortfall from the AFR is treated as imputed interest โ taxable to the lender, and potentially a deemed dividend or compensation to the borrower.
No, it only estimates the corporate-level tax at the flat 21% rate. It excludes state tax and any shareholder-level tax on a deemed dividend.
โป AFR rates change monthly and actual tax treatment depends on your specific facts. This is an estimate only.