What Is the Adjusted Federal Long-Term Rate?

The adjusted federal long-term rate is an interest rate published monthly by the Internal Revenue Service (IRS) for specific tax calculations. It is one of several Applicable Federal Rates (AFRs) derived from the market yields of U.S. Treasury securities and is used for certain provisions of the Internal Revenue Code. This rate is not a benchmark for consumer loans or conventional financing but is a tool used within the tax code to ensure transactions are valued appropriately for tax purposes.

Determining the Adjusted Federal Long-Term Rate

The foundation of this rate is the average market yield of U.S. marketable obligations with remaining maturities of more than nine years. This base rate is known as the federal long-term rate. To arrive at the adjusted federal long-term rate, the IRS modifies this standard rate to account for the differences between taxable U.S. Treasury obligations and tax-exempt obligations.

The calculation involves multiplying the federal long-term rate by an adjustment factor, which ensures the final adjusted rate is lower than the standard long-term federal rate. The final rates are released monthly through IRS Revenue Rulings, which provide a table of all Applicable Federal Rates. Taxpayers can find current and historical rates on the IRS website.

Role in Corporate Ownership Changes

In corporate taxation, the adjusted federal long-term rate is a component in limiting the use of a company’s past losses after a significant change in ownership. This rule, found in Internal Revenue Code Section 382, addresses situations where a profitable company acquires a company with substantial Net Operating Losses (NOLs). An NOL occurs when a company’s tax-deductible expenses exceed its revenues, and these losses can be carried forward to offset future profits.

Section 382 was enacted to prevent “trafficking” in NOLs, where corporations are acquired solely for their tax losses without a genuine business purpose. When an “ownership change” occurs, defined as a more than 50 percentage point shift in stock ownership over a three-year period, the acquiring company’s ability to use the pre-existing NOLs becomes restricted. This annual restriction is known as the Section 382 limitation.

The formula for this annual limitation multiplies the fair market value of the old loss corporation immediately before the ownership change by the long-term tax-exempt rate. The long-term tax-exempt rate is the highest of the adjusted federal long-term rates in effect for any month in the three-month period ending with the calendar month of the ownership change.

For example, if a corporation valued at $10 million is acquired and the applicable long-term tax-exempt rate is 2.5%, the new owner can only use $250,000 of the target’s NOL carryforwards each year. The rate serves as a proxy for the return the acquired company could have earned on its assets, thereby limiting the tax benefit to a level that approximates what the original company could have utilized.