Accounting Dictionary

Imputed Interest

When a debt instrument pays no interest or very low interest, the IRS computes the interest rate you should have gotten and taxes you on that phantom interest.

They impute the interest. For example, instead of paying interest checks some debt instruments increase the principal. The IRS would deem the increase in principal to be taxable interest even though you received no money. If you loaned a family member money and told him that he could repay it without interest, the IRS would not accept that. The IRS has a minimum interest rate that you must charge and they would tax you on interest calculated at that rate even though you received no money.

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