What is the difference between the AFR rate and the adjusted AFR rate?

Distinction Between AFR and Adjusted AFR

The Applicable Federal Rate (AFR) and the Adjusted Applicable Federal Rate (Adjusted AFR) are both interest rates set by the Internal Revenue Service (IRS) for various tax-related purposes. The primary distinctions between the two are as follows:

1. Purpose and Application:

- AFR: The AFR is used to determine the minimum interest rate that can be charged on private loans without creating unwanted tax consequences. It is also used for other tax purposes, such as calculating imputed interest on below-market loans between related parties.

- Adjusted AFR: The Adjusted AFR is an AFR that has been adjusted to reflect the impact of tax-exempt bonds. It is often used in the context of tax-exempt bond transactions to determine the arbitrage rebate, yield restriction, and other calculations that ensure the bonds maintain their tax-exempt status.

2. Calculation and Adjustment:

- AFR: The AFR is calculated monthly and is based on the average market yield of U.S. Treasury securities of similar duration. The IRS publishes these rates in the Internal Revenue Bulletin.

- Adjusted AFR: The Adjusted AFR is the AFR that has been modified to account for the tax advantages of tax-exempt bonds. The adjustments are made to prevent arbitrage and to ensure compliance with the tax regulations governing tax-exempt bonds.

3. Usage in Tax Compliance:

- AFR: The AFR is widely used in various tax calculations, including installment sales, intra-family loans, and certain charitable contributions.

- Adjusted AFR: The Adjusted AFR is specifically used in the context of tax-exempt bonds and is less commonly encountered outside of this area.

4. Publication and Accessibility:

- Both the AFR and the Adjusted AFR are published by the IRS and can be found in the Internal Revenue Bulletin, which is available on the IRS website.

In summary, while the AFR is a general-purpose rate used for a variety of tax calculations, the Adjusted AFR is a specialized rate used primarily in the context of tax-exempt bonds. Both rates are essential for ensuring compliance with tax laws and avoiding unintended tax consequences.

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Internal Revenue Bulletin: 2023-19 2023-05-07

Internal Revenue Bulletin: 2023-14 2023-04-02

Internal Revenue Bulletin: 2023-10 2023-03-05

Internal Revenue Bulletin: 2019-07 2019-02-10

Internal Revenue Bulletin: 2014-41 2014-10-05

2013-02-24 https://www.irs.gov/irb/2013-09_IRB