Example of calculating the taxable benefit

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:

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