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Applicable Federal Rate (AFR) – Explanation and IRS Monthly Updates

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The Applicable Federal Rate (AFR) is the minimum interest rate that must be charged for certain loans to avoid potential tax consequences under U.S. federal tax law. Each month, the Internal Revenue Service (IRS) publishes updated AFR tables that reflect current market conditions.

What Is the Applicable Federal Rate (AFR)?

The AFR represents the lowest rate that can be used for private loans, intra-family loans, or business-related loans without triggering additional taxes. If a loan is made at a rate below the AFR, the IRS may treat the difference as a gift or as imputed interest income.

Types of AFR Rates

The IRS provides three main categories of AFR based on the loan’s term length:

  • Short-Term AFR: For loans with a maturity of 3 years or less.
  • Mid-Term AFR: For loans with a maturity between 3 and 9 years.
  • Long-Term AFR: For loans with a maturity longer than 9 years.

Each category includes multiple compounding options such as annual, semiannual, quarterly, and monthly compounding.

How AFR Is Used in Tax Planning

The AFR is applied in various areas of taxation and financial planning, including:

  • Determining interest on loans between family members or shareholders and corporations.
  • Calculating the value of gift and estate transfers involving trusts or annuities.
  • Discounting future cash flows for certain tax-related valuations.
  • Setting interest rates for installment sales and intra-company financing.

Example

Suppose a parent lends $100,000 to a child with no interest. If the current mid-term AFR is 4.00%, the IRS may treat $4,000 as imputed annual interest, which could have gift tax or income tax consequences for both parties.

Current AFR Rates by Month (IRS Source)

You can access the official monthly AFR tables directly from the IRS here:

Related Tools and Resources

For the latest annual changes and current rate trends, visit the update article: AFR 2025 Updates – Current IRS Rates and Tax Planning

Source: Internal Revenue Service (IRS) – Applicable Federal Rates

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