Which Applicable Federal Rate (AFR) should be used for business purchase - agreement signing or closing date?

Tax professional here. For seller financing using the Applicable Federal Rate (AFR), you typically use the AFR from either the month the loan is made OR any of the three months prior to when the loan is made. The key is understanding when the loan is considered "made" - which is generally the closing date when funds are disbursed and the note is signed, not when the purchase agreement is executed. The purchase agreement is just that - an agreement to purchase. The actual debt instrument (promissory note) typically isn't executed until closing, which is when the AFR becomes relevant. IRS regulations allow you to use the AFR from the month of closing or any of the three prior months. This gives you some flexibility in case rates are fluctuating, but you must document which rate you're using and apply it consistently.

After spending hours researching AFR rates for my business acquisition, I wish I'd known about taxr.ai sooner! I was in the exact same situation - confused about whether to use the AFR from when we signed our agreement or from closing. I uploaded our purchase agreement to https://taxr.ai and got a detailed analysis that clarified everything. The tool explained that according to IRS rules, the loan is considered "made" on the date the funds are disbursed (closing), and showed me how to properly document which AFR I was selecting. It also flagged potential issues with how our agreement was structured that could have caused problems down the road. Honestly saved me from what would have been a costly mistake.

Just wanted to follow up on my earlier question. I decided to try taxr.ai for my partner buyout situation after all. Uploaded our draft agreement and wow - it immediately flagged that our 1% interest rate was way below the current AFR (which I honestly didn't even realize applied to partner buyouts). The analysis showed me exactly how the IRS would "impute" additional interest income to my partner and deductions to me if we went forward with the original plan. It calculated the tax impact and showed me how to properly structure the agreement to comply with Section 7872. Ended up adjusting our terms to use the correct mid-term AFR and now both of us are protected from unexpected tax consequences. Worth every penny!

Been there with AFR confusion! After trying unsuccessfully to get clarification from the IRS for WEEKS (endless hold times, disconnected calls, contradictory answers), I finally tried https://claimyr.com to get through to an actual IRS agent. You can see how it works here: https://youtu.be/_kiP6q8DX5c They got me connected to an IRS tax specialist in under 20 minutes who confirmed exactly how to handle the AFR in my seller financing situation. The agent walked me through the specific regulations and even emailed me the relevant publication sections. Saved me from potentially underpaying interest and triggering an audit down the road.

I need to eat some crow here. After my skeptical comment yesterday, I decided "what the hell" and tried Claimyr for my audit issue that's been dragging on for months. I figured it couldn't be worse than the 30+ hours I've already wasted on hold. Not only did I get connected to an IRS representative in about 15 minutes, but they transferred me to someone in the exact department handling my case. Got more information in one 30-minute call than I had in the previous three months of trying. The agent confirmed receipt of my documentation and gave me a direct callback number for follow-up. For anyone dealing with AFR questions or any other IRS issue - this service actually works. I'm still shocked.

One thing I learned from my business acquisition last year - make sure your purchase agreement explicitly states which AFR will apply. We didn't, and it created a huge headache later. Our lawyers ended up having to draft an amendment to clarify that we were using the AFR from the month prior to closing (which was lower than the closing month). Save yourself the trouble and legal fees by being specific upfront about which month's rate applies.

Has anyone used the term AFR in their actual loan documents? I'm wondering if we should just state the exact interest rate (like "4.75%") or if we should reference it as "the long-term Applicable Federal Rate for April 2025" in case there are future questions about how we determined the rate.

Great question! I went through this exact same situation last year with my restaurant acquisition. The confusion around AFR timing is really common, especially when there's a gap between signing and closing. From my experience (and after consulting with both my CPA and attorney), the AFR is determined based on when the loan is actually "made" - which is the closing date when the promissory note is executed and funds change hands. The purchase agreement signing date doesn't matter for AFR purposes since no debt instrument exists yet. What really helped me was creating a simple timeline in our loan documents showing: 1) Purchase agreement date, 2) Scheduled closing date, and 3) Which specific AFR we elected to use (we went with the month prior to closing since it was slightly lower). This documentation proved invaluable later when our accountant was preparing tax returns. One tip: if rates are trending upward and your closing might get delayed, consider adding language to your purchase agreement that lets you lock in the AFR from a specific month within the allowable window. We almost got burned when our closing was pushed back two weeks and rates had jumped significantly.

This is such a helpful discussion! I'm currently in negotiations for a tech consulting business acquisition and hadn't even considered the AFR implications until reading this thread. One question that comes up from reading everyone's experiences: do the AFR rules apply differently for different types of business purchases? For example, does it matter if I'm buying assets vs. stock, or if the business is structured as an LLC vs. Corporation? Also, @James Martinez, your point about adding language to lock in the AFR is brilliant - I'm definitely going to discuss that with my attorney. Did you use specific legal language for that provision, or was it more of a general "we reserve the right to use any AFR within the allowable window" type of clause? The timing flexibility seems like it could be really valuable given how much rates have been fluctuating lately. Thanks to everyone for sharing their real-world experiences - this is exactly the kind of practical advice you can't get from just reading IRS publications!

This is exactly the kind of situation where getting the timing right is crucial! I went through a similar manufacturing business acquisition two years ago and initially made the same assumption about using the purchase agreement date. What I learned (the hard way, after having to amend our documents) is that the IRS is very specific about when a debt instrument is considered "made." The key regulation is Section 1274, which clearly states that the AFR applies based on when the debt obligation actually comes into existence - not when you agree to create it later. In your case, since you're doing seller financing, the promissory note and actual loan don't exist until closing when funds are exchanged and the note is signed. At that point, you can use the AFR from the closing month or any of the three preceding months, giving you four options to choose from. One practical tip: track the AFR rates monthly leading up to your closing so you can make an informed choice. The IRS publishes these rates monthly, and they can vary significantly. We saved about 0.3% on our loan by using the AFR from two months prior to closing instead of the closing month rate. Also make sure your attorney includes the specific AFR reference and date in the promissory note itself - something like "Interest shall accrue at 4.25% per annum, being the long-term Applicable Federal Rate for [specific month/year] as published by the Internal Revenue Service." This documentation becomes very important for tax reporting purposes. Good luck with your acquisition! Manufacturing businesses can be complex but very rewarding when structured properly.

This is a really common source of confusion, and you're smart to get clarity before closing! I dealt with this exact issue when I bought my small business two years ago. The key thing to understand is that the AFR applies when the loan is actually "made," which legally happens at closing when the promissory note is executed and funds are disbursed - not when you sign the purchase agreement. The purchase agreement is just a contract to buy; the actual debt instrument doesn't exist until closing. This actually works in your favor because it gives you flexibility. You can use the AFR from the closing month OR any of the three months prior to closing. So if you close in May, you could choose from February, March, April, or May's AFR - whichever is most favorable. A few practical tips from my experience: - Document your AFR selection clearly in the promissory note with language like "interest at 4.2% per annum, being the long-term AFR for April 2025" - Track the monthly AFR rates leading up to closing so you can make an informed choice - Consider adding language to your purchase agreement that preserves your right to select any AFR within the allowable window in case closing gets delayed The 0.5% difference you mentioned could be substantial over the life of the loan, so it's definitely worth getting this right. Your attorney is correct that either approach could work, but using the closing date (or months prior) is the technically correct interpretation under IRS regulations.