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File your 2011 taxes for free 4. File your 2011 taxes for free   Interest Table of Contents Introduction Topics - This chapter discusses: Useful Items - You may want to see: Allocation of InterestOrder of funds spent. File your 2011 taxes for free Payments from checking accounts. File your 2011 taxes for free Amounts paid within 30 days. File your 2011 taxes for free Optional method for determining date of reallocation. File your 2011 taxes for free Interest on a segregated account. File your 2011 taxes for free How to report. File your 2011 taxes for free Interest You Can DeductStatement. File your 2011 taxes for free Expenses paid to obtain a mortgage. File your 2011 taxes for free Prepayment penalty. File your 2011 taxes for free De minimis OID. File your 2011 taxes for free Constant-yield method. File your 2011 taxes for free Loan or mortgage ends. File your 2011 taxes for free Interest You Cannot DeductPenalties. File your 2011 taxes for free Who is a key person? Exceptions for pre-June 1997 contracts. File your 2011 taxes for free Interest allocated to unborrowed policy cash value. File your 2011 taxes for free Capitalization of Interest When To Deduct InterestPrepaid interest. File your 2011 taxes for free Discounted loan. File your 2011 taxes for free Refunds of interest. File your 2011 taxes for free Prepaid interest. File your 2011 taxes for free Discounted loan. File your 2011 taxes for free Tax deficiency. File your 2011 taxes for free Related person. File your 2011 taxes for free Below-Market LoansLimit on forgone interest for gift loans of $100,000 or less. File your 2011 taxes for free Introduction This chapter discusses the tax treatment of business interest expense. File your 2011 taxes for free Business interest expense is an amount charged for the use of money you borrowed for business activities. File your 2011 taxes for free Topics - This chapter discusses: Allocation of interest Interest you can deduct Interest you cannot deduct Capitalization of interest When to deduct interest Below-market loans Useful Items - You may want to see: Publication 537 Installment Sales 550 Investment Income and Expenses 936 Home Mortgage Interest Deduction Form (and Instructions) Sch A (Form 1040) Itemized Deductions Sch E (Form 1040) Supplemental Income and Loss Sch K-1 (Form 1065) Partner's Share of Income, Deductions, Credits, etc. File your 2011 taxes for free Sch K-1 (Form 1120S) Shareholder's Share of Income, Deductions, Credits, etc. File your 2011 taxes for free 1098 Mortgage Interest Statement 3115 Application for Change in Accounting Method 4952 Investment Interest Expense Deduction 8582 Passive Activity Loss Limitations See chapter 12 for information about getting publications and forms. File your 2011 taxes for free Allocation of Interest The rules for deducting interest vary, depending on whether the loan proceeds are used for business, personal, or investment activities. File your 2011 taxes for free If you use the proceeds of a loan for more than one type of expense, you must allocate the interest based on the use of the loan's proceeds. File your 2011 taxes for free Allocate your interest expense to the following categories. File your 2011 taxes for free Nonpassive trade or business activity interest Passive trade or business activity interest Investment interest Portfolio interest Personal interest In general, you allocate interest on a loan the same way you allocate the loan proceeds. File your 2011 taxes for free You allocate loan proceeds by tracing disbursements to specific uses. File your 2011 taxes for free The easiest way to trace disbursements to specific uses is to keep the proceeds of a particular loan separate from any other funds. File your 2011 taxes for free Secured loan. File your 2011 taxes for free   The allocation of loan proceeds and the related interest is not generally affected by the use of property that secures the loan. File your 2011 taxes for free Example. File your 2011 taxes for free You secure a loan with property used in your business. File your 2011 taxes for free You use the loan proceeds to buy an automobile for personal use. File your 2011 taxes for free You must allocate interest expense on the loan to personal use (purchase of the automobile) even though the loan is secured by business property. File your 2011 taxes for free    If the property that secures the loan is your home, you generally do not allocate the loan proceeds or the related interest. File your 2011 taxes for free The interest is usually deductible as qualified home mortgage interest, regardless of how the loan proceeds are used. File your 2011 taxes for free For more information, see Publication 936. File your 2011 taxes for free Allocation period. File your 2011 taxes for free   The period for which a loan is allocated to a particular use begins on the date the proceeds are used and ends on the earlier of the following dates. File your 2011 taxes for free The date the loan is repaid. File your 2011 taxes for free The date the loan is reallocated to another use. File your 2011 taxes for free Proceeds not disbursed to borrower. File your 2011 taxes for free   Even if the lender disburses the loan proceeds to a third party, the allocation of the loan is still based on your use of the funds. File your 2011 taxes for free This applies whether you pay for property, services, or anything else by incurring a loan, or you take property subject to a debt. File your 2011 taxes for free Proceeds deposited in borrower's account. File your 2011 taxes for free   Treat loan proceeds deposited in an account as property held for investment. File your 2011 taxes for free It does not matter whether the account pays interest. File your 2011 taxes for free Any interest you pay on the loan is investment interest expense. File your 2011 taxes for free If you withdraw the proceeds of the loan, you must reallocate the loan based on the use of the funds. File your 2011 taxes for free Example. File your 2011 taxes for free Celina, a calendar-year taxpayer, borrows $100,000 on January 4 and immediately uses the proceeds to open a checking account. File your 2011 taxes for free No other amounts are deposited in the account during the year and no part of the loan principal is repaid during the year. File your 2011 taxes for free On April 2, Celina uses $20,000 from the checking account for a passive activity expenditure. File your 2011 taxes for free On September 4, Celina uses an additional $40,000 from the account for personal purposes. File your 2011 taxes for free Under the interest allocation rules, the entire $100,000 loan is treated as property held for investment for the period from January 4 through April 1. File your 2011 taxes for free From April 2 through September 3, Celina must treat $20,000 of the loan as used in the passive activity and $80,000 of the loan as property held for investment. File your 2011 taxes for free From September 4 through December 31, she must treat $40,000 of the loan as used for personal purposes, $20,000 as used in the passive activity, and $40,000 as property held for investment. File your 2011 taxes for free Order of funds spent. File your 2011 taxes for free   Generally, you treat loan proceeds deposited in an account as used (spent) before either of the following amounts. File your 2011 taxes for free Any unborrowed amounts held in the same account. File your 2011 taxes for free Any amounts deposited after these loan proceeds. File your 2011 taxes for free Example. File your 2011 taxes for free On January 9, Olena opened a checking account, depositing $500 of the proceeds of Loan A and $1,000 of unborrowed funds. File your 2011 taxes for free The following table shows the transactions in her account during the tax year. File your 2011 taxes for free Date Transaction January 9 $500 proceeds of Loan A and $1,000 unborrowed funds deposited January 14 $500 proceeds of Loan B  deposited February 19 $800 used for personal purposes February 27 $700 used for passive activity June 19 $1,000 proceeds of Loan C  deposited November 20 $800 used for an investment December 18 $600 used for personal purposes Olena treats the $800 used for personal purposes as made from the $500 proceeds of Loan A and $300 of the proceeds of Loan B. File your 2011 taxes for free She treats the $700 used for a passive activity as made from the remaining $200 proceeds of Loan B and $500 of unborrowed funds. File your 2011 taxes for free She treats the $800 used for an investment as made entirely from the proceeds of Loan C. File your 2011 taxes for free She treats the $600 used for personal purposes as made from the remaining $200 proceeds of Loan C and $400 of unborrowed funds. File your 2011 taxes for free For the periods during which loan proceeds are held in the account, Olena treats them as property held for investment. File your 2011 taxes for free Payments from checking accounts. File your 2011 taxes for free   Generally, you treat a payment from a checking or similar account as made at the time the check is written if you mail or deliver it to the payee within a reasonable period after you write it. File your 2011 taxes for free You can treat checks written on the same day as written in any order. File your 2011 taxes for free Amounts paid within 30 days. File your 2011 taxes for free   If you receive loan proceeds in cash or if the loan proceeds are deposited in an account, you can treat any payment (up to the amount of the proceeds) made from any account you own, or from cash, as made from those proceeds. File your 2011 taxes for free This applies to any payment made within 30 days before or after the proceeds are received in cash or deposited in your account. File your 2011 taxes for free   If the loan proceeds are deposited in an account, you can apply this rule even if the rules stated earlier under Order of funds spent would otherwise require you to treat the proceeds as used for other purposes. File your 2011 taxes for free If you apply this rule to any payments, disregard those payments (and the proceeds from which they are made) when applying the rules stated under Order of funds spent. File your 2011 taxes for free   If you received the loan proceeds in cash, you can treat the payment as made on the date you received the cash instead of the date you actually made the payment. File your 2011 taxes for free Example. File your 2011 taxes for free Giovanni gets a loan of $1,000 on August 4 and receives the proceeds in cash. File your 2011 taxes for free Giovanni deposits $1,500 in an account on August 18 and on August 28 writes a check on the account for a passive activity expense. File your 2011 taxes for free Also, Giovanni deposits his paycheck, deposits other loan proceeds, and pays his bills during the same period. File your 2011 taxes for free Regardless of these other transactions, Giovanni can treat $1,000 of the deposit he made on August 18 as being paid on August 4 from the loan proceeds. File your 2011 taxes for free In addition, Giovanni can treat the passive activity expense he paid on August 28 as made from the $1,000 loan proceeds treated as deposited in the account. File your 2011 taxes for free Optional method for determining date of reallocation. File your 2011 taxes for free   You can use the following method to determine the date loan proceeds are reallocated to another use. File your 2011 taxes for free You can treat all payments from loan proceeds in the account during any month as taking place on the later of the following dates. File your 2011 taxes for free The first day of that month. File your 2011 taxes for free The date the loan proceeds are deposited in the account. File your 2011 taxes for free However, you can use this optional method only if you treat all payments from the account during the same calendar month in the same way. File your 2011 taxes for free Interest on a segregated account. File your 2011 taxes for free   If you have an account that contains only loan proceeds and interest earned on the account, you can treat any payment from that account as being made first from the interest. File your 2011 taxes for free When the interest earned is used up, any remaining payments are from loan proceeds. File your 2011 taxes for free Example. File your 2011 taxes for free You borrowed $20,000 and used the proceeds of this loan to open a new savings account. File your 2011 taxes for free When the account had earned interest of $867, you withdrew $20,000 for personal purposes. File your 2011 taxes for free You can treat the withdrawal as coming first from the interest earned on the account, $867, and then from the loan proceeds, $19,133 ($20,000 − $867). File your 2011 taxes for free All the interest charged on the loan from the time it was deposited in the account until the time of the withdrawal is investment interest expense. File your 2011 taxes for free The interest charged on the part of the proceeds used for personal purposes ($19,133) from the time you withdrew it until you either repay it or reallocate it to another use is personal interest expense. File your 2011 taxes for free The interest charged on the loan proceeds you left in the account ($867) continues to be investment interest expense until you either repay it or reallocate it to another use. File your 2011 taxes for free Loan repayment. File your 2011 taxes for free   When you repay any part of a loan allocated to more than one use, treat it as being repaid in the following order. File your 2011 taxes for free Personal use. File your 2011 taxes for free Investments and passive activities (other than those included in (3)). File your 2011 taxes for free Passive activities in connection with a rental real estate activity in which you actively participate. File your 2011 taxes for free Former passive activities. File your 2011 taxes for free Trade or business use and expenses for certain low-income housing projects. File your 2011 taxes for free Line of credit (continuous borrowings). File your 2011 taxes for free   The following rules apply if you have a line of credit or similar arrangement. File your 2011 taxes for free Treat all borrowed funds on which interest accrues at the same fixed or variable rate as a single loan. File your 2011 taxes for free Treat borrowed funds or parts of borrowed funds on which interest accrues at different fixed or variable rates as different loans. File your 2011 taxes for free Treat these loans as repaid in the order shown on the loan agreement. File your 2011 taxes for free Loan refinancing. File your 2011 taxes for free   Allocate the replacement loan to the same uses to which the repaid loan was allocated. File your 2011 taxes for free Make the allocation only to the extent you use the proceeds of the new loan to repay any part of the original loan. File your 2011 taxes for free Debt-financed distribution. File your 2011 taxes for free   A debt-financed distribution occurs when a partnership or S corporation borrows funds and allocates those funds to distributions made to partners or shareholders. File your 2011 taxes for free The manner in which you report the interest expense associated with the distributed debt proceeds depends on your use of those proceeds. File your 2011 taxes for free How to report. File your 2011 taxes for free   If the proceeds were used in a nonpassive trade or business activity, report the interest on Schedule E (Form 1040), line 28; enter “interest expense” and the name of the partnership or S corporation in column (a) and the amount in column (h). File your 2011 taxes for free If the proceeds were used in a passive activity, follow the Instructions for Form 8582, Passive Activity Loss Limitations, to determine the amount of interest expense that can be reported on Schedule E (Form 1040), line 28; enter “interest expense” and the name of the partnership in column (a) and the amount in column (f). File your 2011 taxes for free If the proceeds were used in an investment activity, enter the interest on Form 4952. File your 2011 taxes for free If the proceeds are used for personal purposes, the interest is generally not deductible. File your 2011 taxes for free Interest You Can Deduct You can generally deduct as a business expense all interest you pay or accrue during the tax year on debts related to your trade or business. File your 2011 taxes for free Interest relates to your trade or business if you use the proceeds of the loan for a trade or business expense. File your 2011 taxes for free It does not matter what type of property secures the loan. File your 2011 taxes for free You can deduct interest on a debt only if you meet all the following requirements. File your 2011 taxes for free You are legally liable for that debt. File your 2011 taxes for free Both you and the lender intend that the debt be repaid. File your 2011 taxes for free You and the lender have a true debtor-creditor relationship. File your 2011 taxes for free Partial liability. File your 2011 taxes for free   If you are liable for part of a business debt, you can deduct only your share of the total interest paid or accrued. File your 2011 taxes for free Example. File your 2011 taxes for free You and your brother borrow money. File your 2011 taxes for free You are liable for 50% of the note. File your 2011 taxes for free You use your half of the loan in your business, and you make one-half of the loan payments. File your 2011 taxes for free You can deduct your half of the total interest payments as a business deduction. File your 2011 taxes for free Mortgage. File your 2011 taxes for free   Generally, mortgage interest paid or accrued on real estate you own legally or equitably is deductible. File your 2011 taxes for free However, rather than deducting the interest currently, you may have to add it to the cost basis of the property as explained later under Capitalization of Interest. File your 2011 taxes for free Statement. File your 2011 taxes for free   If you paid $600 or more of mortgage interest (including certain points) during the year on any one mortgage, you generally will receive a Form 1098 or a similar statement. File your 2011 taxes for free You will receive the statement if you pay interest to a person (including a financial institution or a cooperative housing corporation) in the course of that person's trade or business. File your 2011 taxes for free A governmental unit is a person for purposes of furnishing the statement. File your 2011 taxes for free   If you receive a refund of interest you overpaid in an earlier year, this amount will be reported in box 3 of Form 1098. File your 2011 taxes for free You cannot deduct this amount. File your 2011 taxes for free For information on how to report this refund, see Refunds of interest, later in this chapter. File your 2011 taxes for free Expenses paid to obtain a mortgage. File your 2011 taxes for free   Certain expenses you pay to obtain a mortgage cannot be deducted as interest. File your 2011 taxes for free These expenses, which include mortgage commissions, abstract fees, and recording fees, are capital expenses. File your 2011 taxes for free If the property mortgaged is business or income-producing property, you can amortize the costs over the life of the mortgage. File your 2011 taxes for free Prepayment penalty. File your 2011 taxes for free   If you pay off your mortgage early and pay the lender a penalty for doing this, you can deduct the penalty as interest. File your 2011 taxes for free Interest on employment tax deficiency. File your 2011 taxes for free   Interest charged on employment taxes assessed on your business is deductible. File your 2011 taxes for free Original issue discount (OID). File your 2011 taxes for free   OID is a form of interest. File your 2011 taxes for free A loan (mortgage or other debt) generally has OID when its proceeds are less than its principal amount. File your 2011 taxes for free The OID is the difference between the stated redemption price at maturity and the issue price of the loan. File your 2011 taxes for free   A loan's stated redemption price at maturity is the sum of all amounts (principal and interest) payable on it other than qualified stated interest. File your 2011 taxes for free Qualified stated interest is stated interest that is unconditionally payable in cash or property (other than another loan of the issuer) at least annually over the term of the loan at a single fixed rate. File your 2011 taxes for free You generally deduct OID over the term of the loan. File your 2011 taxes for free Figure the amount to deduct each year using the constant-yield method, unless the OID on the loan is de minimis. File your 2011 taxes for free De minimis OID. File your 2011 taxes for free   The OID is de minimis if it is less than one-fourth of 1% (. File your 2011 taxes for free 0025) of the stated redemption price of the loan at maturity multiplied by the number of full years from the date of original issue to maturity (the term of the loan). File your 2011 taxes for free   If the OID is de minimis, you can choose one of the following ways to figure the amount you can deduct each year. File your 2011 taxes for free On a constant-yield basis over the term of the loan. File your 2011 taxes for free On a straight-line basis over the term of the loan. File your 2011 taxes for free In proportion to stated interest payments. File your 2011 taxes for free In its entirety at maturity of the loan. File your 2011 taxes for free You make this choice by deducting the OID in a manner consistent with the method chosen on your timely filed tax return for the tax year in which the loan is issued. File your 2011 taxes for free Example. File your 2011 taxes for free On January 1, 2013, you took out a $100,000 discounted loan and received $98,500 in proceeds. File your 2011 taxes for free The loan will mature on January 1, 2023 (a 10-year term), and the $100,000 principal is payable on that date. File your 2011 taxes for free Interest of $10,000 is payable on January 1 of each year, beginning January 1, 2014. File your 2011 taxes for free The $1,500 OID on the loan is de minimis because it is less than $2,500 ($100,000 × . File your 2011 taxes for free 0025 × 10). File your 2011 taxes for free You choose to deduct the OID on a straight-line basis over the term of the loan. File your 2011 taxes for free Beginning in 2013, you can deduct $150 each year for 10 years. File your 2011 taxes for free Constant-yield method. File your 2011 taxes for free   If the OID is not de minimis, you must use the constant-yield method to figure how much you can deduct each year. File your 2011 taxes for free You figure your deduction for the first year using the following steps. File your 2011 taxes for free Determine the issue price of the loan. File your 2011 taxes for free Generally, this equals the proceeds of the loan. File your 2011 taxes for free If you paid points on the loan (as discussed later), the issue price generally is the difference between the proceeds and the points. File your 2011 taxes for free Multiply the result in (1) by the yield to maturity. File your 2011 taxes for free Subtract any qualified stated interest payments from the result in (2). File your 2011 taxes for free This is the OID you can deduct in the first year. File your 2011 taxes for free   To figure your deduction in any subsequent year, follow the above steps, except determine the adjusted issue price in step (1). File your 2011 taxes for free To get the adjusted issue price, add to the issue price any OID previously deducted. File your 2011 taxes for free Then follow steps (2) and (3) above. File your 2011 taxes for free   The yield to maturity is generally shown in the literature you receive from your lender. File your 2011 taxes for free If you do not have this information, consult your lender or tax advisor. File your 2011 taxes for free In general, the yield to maturity is the discount rate that, when used in computing the present value of all principal and interest payments, produces an amount equal to the principal amount of the loan. File your 2011 taxes for free Example. File your 2011 taxes for free The facts are the same as in the previous example, except that you deduct the OID on a constant yield basis over the term of the loan. File your 2011 taxes for free The yield to maturity on your loan is 10. File your 2011 taxes for free 2467%, compounded annually. File your 2011 taxes for free For 2013, you can deduct $93 [($98,500 × . File your 2011 taxes for free 102467) − $10,000]. File your 2011 taxes for free For 2014, you can deduct $103 [($98,593 × . File your 2011 taxes for free 102467) − $10,000]. File your 2011 taxes for free Loan or mortgage ends. File your 2011 taxes for free   If your loan or mortgage ends, you may be able to deduct any remaining OID in the tax year in which the loan or mortgage ends. File your 2011 taxes for free A loan or mortgage may end due to a refinancing, prepayment, foreclosure, or similar event. File your 2011 taxes for free If you refinance with the original lender, you generally cannot deduct the remaining OID in the year in which the refinancing occurs, but you may be able to deduct it over the term of the new mortgage or loan. File your 2011 taxes for free See Interest paid with funds borrowed from original lender under Interest You Cannot Deduct, later. File your 2011 taxes for free Points. File your 2011 taxes for free   The term “points” is used to describe certain charges paid, or treated as paid, by a borrower to obtain a loan or a mortgage. File your 2011 taxes for free These charges are also called loan origination fees, maximum loan charges, discount points, or premium charges. File your 2011 taxes for free If any of these charges (points) are solely for the use of money, they are interest. File your 2011 taxes for free   Because points are prepaid interest, you generally cannot deduct the full amount in the year paid. File your 2011 taxes for free However, you can choose to fully deduct points in the year paid if you meet certain tests. File your 2011 taxes for free For exceptions to the general rule, see Publication 936. File your 2011 taxes for free The points reduce the issue price of the loan and result in original issue discount (OID), deductible as explained in the preceding discussion. File your 2011 taxes for free Partial payments on a nontax debt. File your 2011 taxes for free   If you make partial payments on a debt (other than a debt owed the IRS), the payments are applied, in general, first to interest and any remainder to principal. File your 2011 taxes for free You can deduct only the interest. File your 2011 taxes for free This rule does not apply when it can be inferred that the borrower and lender understood that a different allocation of the payments would be made. File your 2011 taxes for free Installment purchase. File your 2011 taxes for free   If you make an installment purchase of business property, the contract between you and the seller generally provides for the payment of interest. File your 2011 taxes for free If no interest or a low rate of interest is charged under the contract, a portion of the stated principal amount payable under the contract may be recharacterized as interest (unstated interest). File your 2011 taxes for free The amount recharacterized as interest reduces your basis in the property and increases your interest expense. File your 2011 taxes for free For more information on installment sales and unstated interest, see Publication 537. File your 2011 taxes for free Interest You Cannot Deduct Certain interest payments cannot be deducted. File your 2011 taxes for free In addition, certain other expenses that may seem to be interest but are not, cannot be deducted as interest. File your 2011 taxes for free You cannot currently deduct interest that must be capitalized, and you generally cannot deduct personal interest. File your 2011 taxes for free Interest paid with funds borrowed from original lender. File your 2011 taxes for free   If you use the cash method of accounting, you cannot deduct interest you pay with funds borrowed from the original lender through a second loan, an advance, or any other arrangement similar to a loan. File your 2011 taxes for free You can deduct the interest expense once you start making payments on the new loan. File your 2011 taxes for free   When you make a payment on the new loan, you first apply the payment to interest and then to the principal. File your 2011 taxes for free All amounts you apply to the interest on the first loan are deductible, along with any interest you pay on the second loan, subject to any limits that apply. File your 2011 taxes for free Capitalized interest. File your 2011 taxes for free   You cannot currently deduct interest you are required to capitalize under the uniform capitalization rules. File your 2011 taxes for free See Capitalization of Interest, later. File your 2011 taxes for free In addition, if you buy property and pay interest owed by the seller (for example, by assuming the debt and any interest accrued on the property), you cannot deduct the interest. File your 2011 taxes for free Add this interest to the basis of the property. File your 2011 taxes for free Commitment fees or standby charges. File your 2011 taxes for free   Fees you incur to have business funds available on a standby basis, but not for the actual use of the funds, are not deductible as interest payments. File your 2011 taxes for free You may be able to deduct them as business expenses. File your 2011 taxes for free   If the funds are for inventory or certain property used in your business, the fees are indirect costs and you generally must capitalize them under the uniform capitalization rules. File your 2011 taxes for free See Capitalization of Interest, later. File your 2011 taxes for free Interest on income tax. File your 2011 taxes for free   Interest charged on income tax assessed on your individual income tax return is not a business deduction even though the tax due is related to income from your trade or business. File your 2011 taxes for free Treat this interest as a business deduction only in figuring a net operating loss deduction. File your 2011 taxes for free Penalties. File your 2011 taxes for free   Penalties on underpaid deficiencies and underpaid estimated tax are not interest. File your 2011 taxes for free You cannot deduct them. File your 2011 taxes for free Generally, you cannot deduct any fines or penalties. File your 2011 taxes for free Interest on loans with respect to life insurance policies. File your 2011 taxes for free   You generally cannot deduct interest on a debt incurred with respect to any life insurance, annuity, or endowment contract that covers any individual unless that individual is a key person. File your 2011 taxes for free   If the policy or contract covers a key person, you can deduct the interest on up to $50,000 of debt for that person. File your 2011 taxes for free However, the deduction for any month cannot be more than the interest figured using Moody's Composite Yield on Seasoned Corporate Bonds (formerly known as Moody's Corporate Bond Yield Average-Monthly Average Corporates) (Moody's rate) for that month. File your 2011 taxes for free Who is a key person?   A key person is an officer or 20% owner. File your 2011 taxes for free However, the number of individuals you can treat as key persons is limited to the greater of the following. File your 2011 taxes for free Five individuals. File your 2011 taxes for free The lesser of 5% of the total officers and employees of the company or 20 individuals. File your 2011 taxes for free Exceptions for pre-June 1997 contracts. File your 2011 taxes for free   You can generally deduct the interest if the contract was issued before June 9, 1997, and the covered individual is someone other than an employee, officer, or someone financially interested in your business. File your 2011 taxes for free If the contract was purchased before June 21, 1986, you can generally deduct the interest no matter who is covered by the contract. File your 2011 taxes for free Interest allocated to unborrowed policy cash value. File your 2011 taxes for free   Corporations and partnerships generally cannot deduct any interest expense allocable to unborrowed cash values of life insurance, annuity, or endowment contracts. File your 2011 taxes for free This rule applies to contracts issued after June 8, 1997, that cover someone other than an officer, director, employee, or 20% owner. File your 2011 taxes for free For more information, see section 264(f) of the Internal Revenue Code. File your 2011 taxes for free Capitalization of Interest Under the uniform capitalization rules, you generally must capitalize interest on debt equal to your expenditures to produce real property or certain tangible personal property. File your 2011 taxes for free The property must be produced by you for use in your trade or business or for sale to customers. File your 2011 taxes for free You cannot capitalize interest related to property that you acquire in any other manner. File your 2011 taxes for free Interest you paid or incurred during the production period must be capitalized if the property produced is designated property. File your 2011 taxes for free Designated property is any of the following. File your 2011 taxes for free Real property. File your 2011 taxes for free Tangible personal property with a class life of 20 years or more. File your 2011 taxes for free Tangible personal property with an estimated production period of more than 2 years. File your 2011 taxes for free Tangible personal property with an estimated production period of more than 1 year if the estimated cost of production is more than $1 million. File your 2011 taxes for free Property you produce. File your 2011 taxes for free   You produce property if you construct, build, install, manufacture, develop, improve, create, raise, or grow it. File your 2011 taxes for free Treat property produced for you under a contract as produced by you up to the amount you pay or incur for the property. File your 2011 taxes for free Carrying charges. File your 2011 taxes for free   Carrying charges include taxes you pay to carry or develop real estate or to carry, transport, or install personal property. File your 2011 taxes for free You can choose to capitalize carrying charges not subject to the uniform capitalization rules if they are otherwise deductible. File your 2011 taxes for free For more information, see chapter 7. File your 2011 taxes for free Capitalized interest. File your 2011 taxes for free   Treat capitalized interest as a cost of the property produced. File your 2011 taxes for free You recover your interest when you sell or use the property. File your 2011 taxes for free If the property is inventory, recover capitalized interest through cost of goods sold. File your 2011 taxes for free If the property is used in your trade or business, recover capitalized interest through an adjustment to basis, depreciation, amortization, or other method. File your 2011 taxes for free Partnerships and S corporations. File your 2011 taxes for free   The interest capitalization rules are applied first at the partnership or S corporation level. File your 2011 taxes for free The rules are then applied at the partners' or shareholders' level to the extent the partnership or S corporation has insufficient debt to support the production or construction costs. File your 2011 taxes for free   If you are a partner or a shareholder, you may have to capitalize interest you incur during the tax year for the production costs of the partnership or S corporation. File your 2011 taxes for free You may also have to capitalize interest incurred by the partnership or S corporation for your own production costs. File your 2011 taxes for free To properly capitalize interest under these rules, you must be given the required information in an attachment to the Schedule K-1 you receive from the partnership or S corporation. File your 2011 taxes for free Additional information. File your 2011 taxes for free   The procedures for applying the uniform capitalization rules are beyond the scope of this publication. File your 2011 taxes for free For more information, see sections 1. File your 2011 taxes for free 263A-8 through 1. File your 2011 taxes for free 263A-15 of the regulations and Notice 88-99. File your 2011 taxes for free Notice 88-99 is in Cumulative Bulletin 1988-2. File your 2011 taxes for free When To Deduct Interest If the uniform capitalization rules, discussed under Capitalization of Interest, earlier, do not apply to you, deduct interest as follows. File your 2011 taxes for free Cash method. File your 2011 taxes for free   Under the cash method, you can generally deduct only the interest you actually paid during the tax year. File your 2011 taxes for free You cannot deduct a promissory note you gave as payment because it is a promise to pay and not an actual payment. File your 2011 taxes for free Prepaid interest. File your 2011 taxes for free   You generally cannot deduct any interest paid before the year it is due. File your 2011 taxes for free Interest paid in advance can be deducted only in the tax year in which it is due. File your 2011 taxes for free Discounted loan. File your 2011 taxes for free   If interest or a discount is subtracted from your loan proceeds, it is not a payment of interest and you cannot deduct it when you get the loan. File your 2011 taxes for free For more information, see Original issue discount (OID) under Interest You Can Deduct, earlier. File your 2011 taxes for free Refunds of interest. File your 2011 taxes for free   If you pay interest and then receive a refund in the same tax year of any part of the interest, reduce your interest deduction by the refund. File your 2011 taxes for free If you receive the refund in a later tax year, include the refund in your income to the extent the deduction for the interest reduced your tax. File your 2011 taxes for free Accrual method. File your 2011 taxes for free   Under an accrual method, you can deduct only interest that has accrued during the tax year. File your 2011 taxes for free Prepaid interest. File your 2011 taxes for free   See Prepaid interest, earlier. File your 2011 taxes for free Discounted loan. File your 2011 taxes for free   See Discounted loan, earlier. File your 2011 taxes for free Tax deficiency. File your 2011 taxes for free   If you contest a federal income tax deficiency, interest does not accrue until the tax year the final determination of liability is made. File your 2011 taxes for free If you do not contest the deficiency, then the interest accrues in the year the tax was asserted and agreed to by you. File your 2011 taxes for free   However, if you contest but pay the proposed tax deficiency and interest, and you do not designate the payment as a cash bond, then the interest is deductible in the year paid. File your 2011 taxes for free Related person. File your 2011 taxes for free   If you use an accrual method, you cannot deduct interest owed to a related person who uses the cash method until payment is made and the interest is includible in the gross income of that person. File your 2011 taxes for free The relationship is determined as of the end of the tax year for which the interest would otherwise be deductible. File your 2011 taxes for free See section 267 of the Internal Revenue Code for more information. File your 2011 taxes for free Below-Market Loans If you receive a below-market gift or demand loan and use the proceeds in your trade or business, you may be able to deduct the forgone interest. File your 2011 taxes for free See Treatment of gift and demand loans, later, in this discussion. File your 2011 taxes for free A below-market loan is a loan on which no interest is charged or on which interest is charged at a rate below the applicable federal rate. File your 2011 taxes for free A gift or demand loan that is a below-market loan generally is considered an arm's-length transaction in which you, the borrower, are considered as having received both the following. File your 2011 taxes for free A loan in exchange for a note that requires the payment of interest at the applicable federal rate. File your 2011 taxes for free An additional payment in an amount equal to the forgone interest. File your 2011 taxes for free The additional payment is treated as a gift, dividend, contribution to capital, payment of compensation, or other payment, depending on the substance of the transaction. File your 2011 taxes for free Forgone interest. File your 2011 taxes for free   For any period, forgone interest is The interest that would be payable for that period if interest accrued on the loan at the applicable federal rate and was payable annually on December 31, minus Any interest actually payable on the loan for the period. File your 2011 taxes for free Applicable federal rates are published by the IRS each month in the Internal Revenue Bulletin. File your 2011 taxes for free Internal Revenue Bulletins are available on the IRS web site at www. File your 2011 taxes for free irs. File your 2011 taxes for free gov/irb. File your 2011 taxes for free You can also contact an IRS office to get these rates. File your 2011 taxes for free Loans subject to the rules. File your 2011 taxes for free   The rules for below-market loans apply to the following. File your 2011 taxes for free Gift loans (below-market loans where the forgone interest is in the nature of a gift). File your 2011 taxes for free Compensation-related loans (below-market loans between an employer and an employee or between an independent contractor and a person for whom the contractor provides services). File your 2011 taxes for free Corporation-shareholder loans. File your 2011 taxes for free Tax avoidance loans (below-market loans where the avoidance of federal tax is one of the main purposes of the interest arrangement). File your 2011 taxes for free Loans to qualified continuing care facilities under a continuing care contract (made after October 11, 1985). File your 2011 taxes for free   Except as noted in (5) above, these rules apply to demand loans (loans payable in full at any time upon the lender's demand) outstanding after June 6, 1984, and to term loans (loans that are not demand loans) made after that date. File your 2011 taxes for free Treatment of gift and demand loans. File your 2011 taxes for free   If you receive a below-market gift loan or demand loan, you are treated as receiving an additional payment (as a gift, dividend, etc. File your 2011 taxes for free ) equal to the forgone interest on the loan. File your 2011 taxes for free You are then treated as transferring this amount back to the lender as interest. File your 2011 taxes for free These transfers are considered to occur annually, generally on December 31. File your 2011 taxes for free If you use the loan proceeds in your trade or business, you can deduct the forgone interest each year as a business interest expense. File your 2011 taxes for free The lender must report it as interest income. File your 2011 taxes for free Limit on forgone interest for gift loans of $100,000 or less. File your 2011 taxes for free   For gift loans between individuals, forgone interest treated as transferred back to the lender is limited to the borrower's net investment income for the year. File your 2011 taxes for free This limit applies if the outstanding loans between the lender and borrower total $100,000 or less. File your 2011 taxes for free If the borrower's net investment income is $1,000 or less, it is treated as zero. File your 2011 taxes for free This limit does not apply to a loan if the avoidance of any federal tax is one of the main purposes of the interest arrangement. File your 2011 taxes for free Treatment of term loans. File your 2011 taxes for free   If you receive a below-market term loan other than a gift or demand loan, you are treated as receiving an additional cash payment (as a dividend, etc. File your 2011 taxes for free ) on the date the loan is made. File your 2011 taxes for free This payment is equal to the loan amount minus the present value, at the applicable federal rate, of all payments due under the loan. File your 2011 taxes for free The same amount is treated as original issue discount on the loan. File your 2011 taxes for free See Original issue discount (OID) under Interest You Can Deduct, earlier. File your 2011 taxes for free Exceptions for loans of $10,000 or less. File your 2011 taxes for free   The rules for below-market loans do not apply to any day on which the total outstanding loans between the borrower and lender is $10,000 or less. File your 2011 taxes for free This exception applies only to the following. File your 2011 taxes for free Gift loans between individuals if the loan is not directly used to buy or carry income-producing assets. File your 2011 taxes for free Compensation-related loans or corporation-shareholder loans if the avoidance of any federal tax is not a principal purpose of the interest arrangement. File your 2011 taxes for free This exception does not apply to a term loan described in (2) above that was previously subject to the below-market loan rules. File your 2011 taxes for free Those rules will continue to apply even if the outstanding balance is reduced to $10,000 or less. File your 2011 taxes for free Exceptions for loans without significant tax effect. File your 2011 taxes for free   The following loans are specifically exempted from the rules for below-market loans because their interest arrangements do not have a significant effect on the federal tax liability of the borrower or the lender. File your 2011 taxes for free Loans made available by lenders to the general public on the same terms and conditions that are consistent with the lender's customary business practices. File your 2011 taxes for free Loans subsidized by a federal, state, or municipal government that are made available under a program of general application to the public. File your 2011 taxes for free Certain employee-relocation loans. File your 2011 taxes for free Certain loans to or from a foreign person, unless the interest income would be effectively connected with the conduct of a U. File your 2011 taxes for free S. File your 2011 taxes for free trade or business and not exempt from U. File your 2011 taxes for free S. File your 2011 taxes for free tax under an income tax treaty. File your 2011 taxes for free Any other loan if the taxpayer can show that the interest arrangement has no significant effect on the federal tax liability of the lender or the borrower. File your 2011 taxes for free Whether an interest arrangement has a significant effect on the federal tax liability of the lender or the borrower will be determined by all the facts and circumstances. File your 2011 taxes for free Consider all the following factors. File your 2011 taxes for free Whether items of income and deduction generated by the loan offset each other. File your 2011 taxes for free The amount of the items. File your 2011 taxes for free The cost of complying with the below-market loan provisions if they were to apply. File your 2011 taxes for free Any reasons, other than taxes, for structuring the transaction as a below-market loan. File your 2011 taxes for free Exception for loans to qualified continuing care facilities. File your 2011 taxes for free   The below-market interest rules do not apply to a loan owed by a qualified continuing care facility under a continuing care contract if the lender or lender's spouse is age 62 or older by the end of the calendar year. File your 2011 taxes for free A qualified continuing care facility is one or more facilities (excluding nursing homes) meeting the requirements listed below. File your 2011 taxes for free Designed to provide services under continuing care contracts (defined below). File your 2011 taxes for free Includes an independent living unit, and either an assisted living or nursing facility, or both. File your 2011 taxes for free Substantially all of the independent living unit residents are covered by continuing care contracts. File your 2011 taxes for free A continuing care contract is a written contract between an individual and a qualified continuing care facility that includes all of the following conditions. File your 2011 taxes for free The individual or individual's spouse must be entitled to use the facility for the rest of their life or lives. File your 2011 taxes for free The individual or individual's spouse will be provided with housing, as appropriate for the health of the individual or individual's spouse in an: independent living unit (which has additional available facilities outside the unit for the provision of meals and other personal care), and assisted living or nursing facility available in the continuing care facility. File your 2011 taxes for free The individual or individual's spouse will be provided with assisted living or nursing care available in the continuing care facility, as required for the health of the individual or the individual's spouse. File your 2011 taxes for free For more information, see section 7872(h) of the Internal Revenue Code. File your 2011 taxes for free Sale or exchange of property. File your 2011 taxes for free   Different rules generally apply to a loan connected with the sale or exchange of property. File your 2011 taxes for free If the loan does not provide adequate stated interest, part of the principal payment may be considered interest. File your 2011 taxes for free However, there are exceptions that may require you to apply the below-market interest rate rules to these loans. File your 2011 taxes for free See Unstated Interest and Original Issue Discount (OID) in Publication 537. File your 2011 taxes for free More information. File your 2011 taxes for free   For more information on below-market loans, see section 7872 of the Internal Revenue Code and section 1. File your 2011 taxes for free 7872-5 of the regulations. File your 2011 taxes for free Prev  Up  Next   Home   More Online Publications
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Fiscal Year 2013 Enforcement and Service Results

The Fiscal Year 2013 Enforcement and Service Results tables provide details about IRS audit, collection and taxpayer service. Fiscal Year 2013 began on Oct. 1, 2012, and ended on Sept. 30, 2013.

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The File Your 2011 Taxes For Free

File your 2011 taxes for free Index A Aircraft, Cars, Boats, and Aircraft Annuities, Annuities, Interests for Life or Terms of Years, Remainders, and Reversions Annuity contracts, Certain Life Insurance and Annuity Contracts Antiques, Paintings, Antiques, and Other Objects of Art Appraisals, Appraisals Cost of, Cost of appraisals. File your 2011 taxes for free IRS review of, Internal Revenue Service Review of Appraisals Qualified appraisal, Qualified Appraisal Appraiser, Qualified appraiser. File your 2011 taxes for free Art objects, Paintings, Antiques, and Other Objects of Art Valued at $20,000 or more, Art valued at $20,000 or more. File your 2011 taxes for free Valued at $50,000 or more, Art valued at $50,000 or more. File your 2011 taxes for free Assistance (see Tax help) B Boats, Cars, Boats, and Aircraft Bonds, Stocks and Bonds Books, Books. File your 2011 taxes for free Business, interest in, Interest in a Business C Cars, Cars, Boats, and Aircraft Clothing, used, Used Clothing, Deduction over $500 for certain clothing or household items. File your 2011 taxes for free Coins, Coin collections. File your 2011 taxes for free Collections, Collections Books, Books. File your 2011 taxes for free Coins, Coin collections. File your 2011 taxes for free Stamps, Stamp collections. File your 2011 taxes for free Comments on publication, Comments and suggestions. File your 2011 taxes for free Comparable properties, sales of, Sales of Comparable Properties, Selection of Comparable Sales Conservation contribution, Conservation purposes. File your 2011 taxes for free Cost, Cost or Selling Price of the Donated Property Rate of increase or decrease, Rate of increase or decrease in value. File your 2011 taxes for free Terms of purchase or sale, Terms of the purchase or sale. File your 2011 taxes for free D Date of contribution, Date of contribution. File your 2011 taxes for free Deductions of more than $5,000, Deductions of More Than $5,000 Deductions of more than $500,000, Deductions of More Than $500,000 F Fair market value, What Is Fair Market Value (FMV)? Comparable properties, sales of, Sales of Comparable Properties Cost, Cost or Selling Price of the Donated Property Date of contribution, Date of contribution. File your 2011 taxes for free Determining FMV, Determining Fair Market Value Opinions of experts, Opinions of Experts Problems in determining FMV, Problems in Determining Fair Market Value Replacement cost, Replacement Cost Form 8283, Form 8283 Formulas, use in valuing property, Determining Fair Market Value Free tax services, How To Get Tax Help Future events, effect on value, Future Events H Help (see Tax help) Historic building, Building in registered historic district. File your 2011 taxes for free Household goods, Household Goods, Deduction over $500 for certain clothing or household items. File your 2011 taxes for free I Interest in a business, Interest in a Business Inventory, Inventory IRS review of appraisals, Internal Revenue Service Review of Appraisals Exception, Exception. File your 2011 taxes for free J Jewelry and gems, Jewelry and Gems L Life insurance, Certain Life Insurance and Annuity Contracts M Market conditions, effect on value, Unusual Market Conditions More information (see Tax help) O Opinions of experts, Opinions of Experts P Paintings, Paintings, Antiques, and Other Objects of Art Partial interest, Partial Interest in Property Not in Trust Past events, effect on value, Using Past Events to Predict the Future Patents, Patents Penalties: Imposed on appraiser, Appraiser penalties. File your 2011 taxes for free Imposed on taxpayer, Penalty Publications (see Tax help) Publicly traded securities, Publicly traded securities. File your 2011 taxes for free Q Qualified appraisal, Qualified Appraisal Qualified appraiser, Qualified appraiser. File your 2011 taxes for free Qualified conservation contribution, Qualified Conservation Contribution R Real estate, Real Estate Remainder interests, Annuities, Interests for Life or Terms of Years, Remainders, and Reversions Replacement cost, Replacement Cost Reversion interests, Annuities, Interests for Life or Terms of Years, Remainders, and Reversions S Stamps, Stamp collections. File your 2011 taxes for free Statement of Value, Exception. File your 2011 taxes for free Stocks, Stocks and Bonds Suggestions for publication, Comments and suggestions. File your 2011 taxes for free T Tax help, How To Get Tax Help Taxpayer Advocate, Contacting your Taxpayer Advocate. File your 2011 taxes for free TTY/TDD information, How To Get Tax Help U Used clothing, Used Clothing, Deduction over $500 for certain clothing or household items. File your 2011 taxes for free V Valuation of property, Valuation of Various Kinds of Property Annuities, Annuities, Interests for Life or Terms of Years, Remainders, and Reversions Cars, boats, and aircraft, Cars, Boats, and Aircraft Collections, Collections Household goods, Household Goods Interest in a business, Interest in a Business Inventory, Inventory Jewelry and gems, Jewelry and Gems Life insurance and annuity contracts, Certain Life Insurance and Annuity Contracts Paintings, antiques, art objects, Paintings, Antiques, and Other Objects of Art Partial interest in property, Partial Interest in Property Not in Trust Real estate, Real Estate Remainder interests, Annuities, Interests for Life or Terms of Years, Remainders, and Reversions Reversion interests, Annuities, Interests for Life or Terms of Years, Remainders, and Reversions Stocks and bonds, Stocks and Bonds Terms of years, Annuities, Interests for Life or Terms of Years, Remainders, and Reversions Used clothing, Used Clothing Valuation of property: Patents, Patents Prev  Up     Home   More Online Publications