Applicable federal rates are used for a number of federal tax provisions. For example, Code Sec. 1274 uses AFRs to determine whether a debt instrument has original issue discount (OID) or imputed interest. This determination requires the calculation of the present value of payments made on the debt instrument; present value is calculated using a discount rate equal to the AFR, compounded semi-annually. Many other Internal Revenue Code sections use AFR rates as a starting point for determining valuation, income or deductions.
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