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

Difference Between the AFR and the Adjusted AFR

1. AFR (Applicable Federal Rate)

The Applicable Federal Rate (AFR) is the baseline interest rate the IRS publishes monthly for federal tax purposes (e.g., below-market loans, original issue discount, deferred payments).
It is based on market yields of U.S. Treasury securities.

Common uses:

• Imputed interest on below-market loans (IRC §7872)
• Installment sales and original issue discount (IRC §§1274, 483)

2. Adjusted AFR (Adjusted Applicable Federal Rate)

The Adjusted AFR is a modified version of the AFR that is used only in specific tax code situations, primarily when accounting for the tax-exempt status of interest on certain obligations.

The adjusted AFR is computed by the Treasury by taking the applicable AFR and applying an adjustment factor required under the Internal Revenue Code.

Where it appears:

IRS publishes adjusted AFRs in the same monthly revenue rulings that list AFRs, for example, see Rev. Rul. 2025-13 which contains both AFR and adjusted AFR tables.

Sources:

• Applicable Federal Rates (AFRs) — IRS list of revenue rulings with AFRs
• 26 U.S. Code §1274(d) Applicable Federal Rates definition and determination
• 26 CFR §1.1288‑1 Adjustment of Applicable Federal Rate
• 26 U.S. Code §1288 Treatment of tax‑exempt obligations and adjusted AFR authority