Example of calculating the taxable benefit

Example

Joshua is your employee. He borrowed $150,000 from you at the beginning of the year. The prescribed rate of interest for the loan is 3% for the first quarter, 4% for the second and third quarters, and 5% for the fourth quarter. Joshua paid you $2,000 interest on the loan no later than 30 days after the end of the year. During the year, a company related to you paid $1,000 interest on the loan for Joshua. Before the end of the same year, Joshua repaid the $1,000 to the company.

Calculation of interest on loan amount

Prescribed interest rate Loan amount Part of year Interest for the period
3% $150,000 1/4 $1,125
4% $150,000 1/4 $1,500
4% $150,000 1/4 $1,500
5% $150,000 1/4 $1,875

The sum of the interest for all four quarters is $6,000.

Calculate the benefit to include in his income as follows:

Interest for the year (see calculation of interest on loan amount)
$6,000
Plus: Amount paid by a third party
$1,000
Minus: Interest paid ($2,000 + $1,000)
$3,000
Minus: Amount Joshua repaid
$1,000
Equals: Joshua's taxable benefit
$3,000
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