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:

Calculation of interest on loan amount

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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