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Filing A Tax Amendment

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Filing A Tax Amendment

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

Filing a tax amendment Publication 3991 - Introductory Material Table of Contents Introduction Introduction All of the changes discussed in this publication resulted from the Job Creation and Worker Assistance Act of 2002. Filing a tax amendment This publication highlights tax law changes that took effect retroactively for 2001 and others that take effect in 2002 and later years. Filing a tax amendment The chapters are divided into separate sections based on when the changes take effect. Filing a tax amendment For example, this publication covers the following topics. Filing a tax amendment Tax benefits for the area of New York City damaged in terrorist attacks on September 11, 2001. Filing a tax amendment New deduction available for educator expenses. Filing a tax amendment Limit on the use of the non-accrual experience method of accounting. Filing a tax amendment Pension changes such as the new tax credit for certain pension plan startup costs, an increased SEP contribution limit, figuring 403(b) catch-up contributions, and a provision for deemed IRAs. Filing a tax amendment Extension of the welfare-to-work credit and work opportunity credit. Filing a tax amendment New 5-year carryback rule for net operating losses (NOLs). Filing a tax amendment See the discussion of each topic for more information. Filing a tax amendment Certain changes had a major effect on two of the publications we issued for 2001. Filing a tax amendment We published supplements to those two publications and they have been included in this publication as follows. Filing a tax amendment Chapter 4 contains the supplement to Publication 463, Travel, Entertainment, Gift, and Car Expenses. Filing a tax amendment This discusses the increase in the amount of depreciation deduction for certain automobiles. Filing a tax amendment Chapter 5 contains the supplement to Publication 946, How To Depreciate Property. Filing a tax amendment This discusses the special depreciation allowance for property acquired after September 10, 2001. Filing a tax amendment Adjusting your withholding or estimated tax payments for 2002. Filing a tax amendment   If your tax for 2002 will be more or less than your 2001 tax, you may need to adjust your withholding or estimated tax payments accordingly. Filing a tax amendment If your tax will decrease, you can get the benefit of lower taxes throughout the year. Filing a tax amendment If you will owe more tax, you can avoid a penalty when you file your tax return. Filing a tax amendment   See the following table for forms and publications that will help you adjust your withholding or estimated tax payments. Filing a tax amendment See chapter 6 for information on ordering forms and publications. Filing a tax amendment To adjust your. Filing a tax amendment . Filing a tax amendment . Filing a tax amendment . Filing a tax amendment Get Form. Filing a tax amendment . Filing a tax amendment . Filing a tax amendment And Publication. Filing a tax amendment . Filing a tax amendment . Filing a tax amendment Withholding W–4, Employee's Withholding Allowance Certificate 919, How Do I Adjust My Tax Withholding? Estimated tax payments 1040–ES, Estimated Tax for Individuals 505, Tax Withholding and Estimated Tax Photographs of missing children. Filing a tax amendment   The Internal Revenue Service is a proud partner with the National Center for Missing and Exploited Children. Filing a tax amendment Photographs of missing children selected by the Center may appear in this publication on pages that would otherwise be blank. Filing a tax amendment You can help bring these children home by looking at the photographs and calling 1–800–THE–LOST (1–800–843–5678) if you recognize a child. Filing a tax amendment Comments and suggestions. Filing a tax amendment   We welcome your comments about this publication. Filing a tax amendment   You can e-mail us while visiting our web site at www. Filing a tax amendment irs. Filing a tax amendment gov. Filing a tax amendment   You can write to us at the following address: Internal Revenue Service Technical Publications Branch W:CAR:MP:FP:P 1111 Constitution Ave. Filing a tax amendment NW Washington, DC 20224   We respond to many letters by telephone. Filing a tax amendment Therefore, it would be helpful if you would include your daytime phone number, including the area code, in your correspondence. Filing a tax amendment Prev  Up  Next   Home   More Online Publications