Under section 7872 of the Internal Revenue Code, there is interest imputed to "below market loans" between family members, employers and employees, corporations and shareholders, and in other situations. For a loan payable on demand, the short-term applicable federal rate would apply for the purpose of calculating any foregone interest, and because that rate can change monthly, the calculation of interest would have to be month-by-month, with monthly compounding of accrued interest.
To simplify calculations of interest for demand loans, I.R.C. section 7872(e)(2) allows the use of a "blended annual rate" for demand loans with a fixed principal amount outstanding for an entire calendar year. According to Rev. Rul. 86-17, 1986-1 C.B. 377, the blended annual rate is the product of (a) one half of the January semiannual short-term applicable federal rate times (b) one half of the July semiannual short-term applicable federal rate. This blended annual rate is published by the Internal Revenue Service in a Revenue Ruling every June, based on the relevant rates for January and July of that year.
The following is a chart of the blended annual rates from 1985 to the present. For the interest rates to apply to low-interest (or interest-free) demand loans before 1985, see Rev. Proc. 85-46, 1985-2 C.B. 507.
| Calendar Year | Blended Annual Rate |
|---|---|
| 1985 | 9.24% |
| 1986 | 7.77% |
| 1987 | 6.81% |
| 1988 | 7.72% |
| 1989 | 8.94% |
| 1990 | 8.19% |
| 1991 | 7.11% |
| 1992 | 4.98% |
| 1993 | 4.16% |
| 1994 | 4.80% |
| 1995 | 6.58% |
| 1996 | 5.77% |
| 1997 | 5.85% |
| 1998 | 5.63% |
| 1999 | 4.94% |
| 2000 | 6.24% |
| 2001 | 4.98% |
| 2002 | 2.78% |
| 2003 | 1.52% |
| 2004 | 1.98% |
| 2005 | 3.11% |
| 2006 | 4.71% |
| 2007 | 4.92% |
| 2008 | 2.80% |
| 2009 | 0.82% |