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.
Calculate the benefit to include in his income as follows:
Prescribed interest rate | Loan amount | Part of year | Interest for the quarter |
---|---|---|---|
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 |
Total interest for the quarters ................................................................................. $6,000
Plus
Amount paid by a third party .................................................................................. $1,000
Minus
Interest paid ($2,000 + $1,000) ................................................................................ $3,000
Amount Joshua repaid .............................................................................................. $1,000
Equals
Joshua's taxable benefit ................................................................................... $3,000
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