Minimum-Interest Rules
Categories: Bonds
No, this is not about watching CSPAN.
IRS rules allow people a tax-free exemption for gifts. That’s why you don’t have to itemize the socks and coffee mugs you get for Christmas each year.
However, there is an upward limit. Otherwise, you’d just do your employer a “favor” for 40 hours a week, and then (purely as a sign of friendship) they’d give you a “gift” of $50,000 a year. No one would pay any taxes.
The minimum interest rate rules aim to close a similar loophole. Fundamentally, they state that any loan needs to be paid back with some minimum interest rate. Or, to put it another way, it has to be a real loan.
Otherwise, your employer might give you a “loan” of $50,000, with a 0% interest rate...a loan you would then “forget” to pay back.
The details of the minimum interest rate rules get pretty intricate. There are various exceptions and benchmarks and other minimums involved. But the underlying premise of the regulations require that the loan meet some basic standard to qualify as a "loan."