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Filing My 2012 Taxes

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Filing My 2012 Taxes

Filing my 2012 taxes Publication 3402 - Main Content Table of Contents What is a Limited Liability Company? Classification of an LLC LLCs Classified as Partnerships LLCs Classified as Disregarded Entities LLCs Classified as Corporations Subsequent Elections How To Get More InformationInternal Revenue Service Small Business Administration Other Federal Agencies What is a Limited Liability Company? For purposes of this publication, a limited liability company (LLC) is a business entity organized in the United States under state law. Filing my 2012 taxes Unlike a partnership, all of the members of an LLC have limited personal liability for its debts. Filing my 2012 taxes An LLC may be classified for federal income tax purposes as a partnership, corporation, or an entity disregarded as separate from its owner by applying the rules in Regulations section 301. Filing my 2012 taxes 7701-3. Filing my 2012 taxes The information in this publication applies to LLCs in general, and different rules may apply to special situations, including banks, insurance companies, or nonprofit organizations that are LLCs or that own LLCs. Filing my 2012 taxes Check your state's requirements and the federal tax regulations for further information. Filing my 2012 taxes Classification of an LLC Default classification rules. Filing my 2012 taxes   An LLC with at least two members is classified as a partnership for federal income tax purposes. Filing my 2012 taxes An LLC with only one member is treated as an entity disregarded as separate from its owner for income tax purposes (but as a separate entity for purposes of employment tax and certain excise taxes). Filing my 2012 taxes Also, an LLC's federal tax classification can subsequently change under certain default rules discussed later. Filing my 2012 taxes Elected classification. Filing my 2012 taxes   If an LLC does not choose to be classified under the above default classifications, it can elect to be classified as an association taxable as a corporation or as an S corporation. Filing my 2012 taxes After an LLC has determined its federal tax classification, it can later elect to change that classification. Filing my 2012 taxes For details, see Subsequent Elections, later. Filing my 2012 taxes LLCs Classified as Partnerships If an LLC has at least two members and is classified as a partnership, it generally must file Form 1065, U. Filing my 2012 taxes S. Filing my 2012 taxes Return of Partnership Income. Filing my 2012 taxes Generally, an LLC classified as a partnership is subject to the same filing and reporting requirements as partnerships. Filing my 2012 taxes For certain purposes, members of an LLC are treated as limited partners in a limited partnership. Filing my 2012 taxes For example, LLC members are treated as limited partners for purposes of material participation under the passive activity limitation rules (see Temporary Regulation section 1. Filing my 2012 taxes 469-5T(e)). Filing my 2012 taxes See the Instructions for Form 1065 for reporting rules that apply specifically to LLCs. Filing my 2012 taxes Member manager. Filing my 2012 taxes   Only a member manager of an LLC can sign the partnership tax return. Filing my 2012 taxes And only a member manager can represent the LLC as the tax matters partner under the consolidated audit proceedings in sections 6221 through 6234. Filing my 2012 taxes A member manager is any owner of an interest in the LLC who, alone or together with others, has the continuing authority to make the management decisions necessary to conduct the business for which the LLC was formed. Filing my 2012 taxes If there are no elected or designated member managers, each owner is treated as a member manager. Filing my 2012 taxes Change in default classification. Filing my 2012 taxes   If the number of members in an LLC classified as a partnership is reduced to only one member, it becomes an entity disregarded as separate from its owner under Regulations section 301. Filing my 2012 taxes 7701-3(f)(2). Filing my 2012 taxes However, if the LLC has made an election to be classified as a corporation (discussed later) and that elective classification is in effect at the time of the change in membership, the default classification as a disregarded entity will not apply. Filing my 2012 taxes   Other tax consequences of a change in membership, such as recognition of gain or loss, are determined by the transactions through which an interest in the LLC is acquired or disposed of. Filing my 2012 taxes If a partnership that becomes a disregarded entity as a result of a decrease in the number of members makes an election to be classified as a corporation, the applicable deemed transactions discussed under Subsequent Elections, later, apply. Filing my 2012 taxes Example 1. Filing my 2012 taxes Ethel and Francis are members of an LLC classified as a partnership for federal tax purposes. Filing my 2012 taxes Each holds an equal membership interest. Filing my 2012 taxes The LLC does not hold any unrealized receivables or substantially appreciated inventory. Filing my 2012 taxes Ethel sells her entire interest in the LLC to Francis for $10,000. Filing my 2012 taxes After the sale, the business is continued by the LLC, which is owned solely by Francis. Filing my 2012 taxes No entity classification election is made after the sale to treat the LLC as a corporation for federal tax purposes. Filing my 2012 taxes The partnership terminates when Francis buys Ethel's entire interest. Filing my 2012 taxes Ethel must treat the transaction as the sale of a partnership interest and must report gain or loss, if any, resulting from the sale of her partnership interest. Filing my 2012 taxes For purposes of determining the tax treatment of Francis, the partnership is deemed to make a liquidating distribution of all of its assets to Ethel and Francis, and after this distribution, Francis is treated as acquiring the assets deemed to have been distributed to Ethel in liquidation of Ethel's partnership interest. Filing my 2012 taxes Francis's basis in the assets attributable to Ethel's one-half interest in the partnership is $10,000, the purchase price for Ethel's partnership interest. Filing my 2012 taxes Upon the termination of the partnership, Francis is considered to receive a distribution of those assets attributable to Francis's former interest in the partnership. Filing my 2012 taxes Francis must recognize gain or loss, if any, on the deemed distribution of the assets to the extent required by Internal Revenue Code section 731(a). Filing my 2012 taxes See Partnership Distributions in Publication 541. Filing my 2012 taxes Example 2. Filing my 2012 taxes George and Henrietta are members of an LLC classified as a partnership for federal tax purposes. Filing my 2012 taxes Each holds an equal membership interest. Filing my 2012 taxes The LLC does not hold any unrealized receivables or substantially appreciated inventory. Filing my 2012 taxes George and Henrietta each sell their entire interests in the LLC to Ian, an unrelated person, in exchange for $10,000. Filing my 2012 taxes After the sale, the business is continued by the LLC, which is owned solely by Ian. Filing my 2012 taxes No entity classification election is made after the sale to treat the LLC as a corporation for federal tax purposes. Filing my 2012 taxes The partnership terminates when Ian purchases the entire interests of George and Henrietta in the LLC. Filing my 2012 taxes George and Henrietta must report gain or loss, if any, resulting from the sale of their partnership interests. Filing my 2012 taxes For purposes of classifying the acquisition by Ian, the partnership is deemed to make a liquidating distribution of its assets to George and Henrietta. Filing my 2012 taxes Immediately following this distribution, Ian is deemed to acquire, by purchase, all of the former partnership's assets. Filing my 2012 taxes   For more details on the preceding two examples, see Revenue Ruling 99-6, 1999-6 I. Filing my 2012 taxes R. Filing my 2012 taxes B. Filing my 2012 taxes 6. Filing my 2012 taxes You can find Revenue Ruling 99-6 at www. Filing my 2012 taxes irs. Filing my 2012 taxes gov/pub/irs-irbs/irb99-06. Filing my 2012 taxes pdf. Filing my 2012 taxes LLCs Classified as Disregarded Entities If an LLC has only one member and is classified as an entity disregarded as separate from its owner, its income, deductions, gains, losses, and credits are reported on the owner's income tax return. Filing my 2012 taxes For example, if the owner of the LLC is an individual, the LLC's income and expenses would be reported on the following schedules filed with the owner's Form 1040: Schedule C, Profit or Loss from Business (Sole Proprietorship); Schedule C-EZ, Net Profit From Business (Sole Proprietorship); Schedule E, Supplemental Income and Loss; or Schedule F, Profit or Loss From Farming. Filing my 2012 taxes Employment tax and certain excise taxes. Filing my 2012 taxes   A single-member LLC that is classified as a disregarded entity for income tax purposes is treated as a separate entity for purposes of employment tax and certain excise taxes. Filing my 2012 taxes For wages paid after January 1, 2009, the single-member LLC is required to use its name and employer identification number (EIN) for reporting and payment of employment taxes. Filing my 2012 taxes A single-member LLC is also required to use its name and EIN to register for excise tax activities on Form 637; pay and report excise taxes reported on Forms 720, 730, 2290, and 11-C; and claim any refunds, credits, and payments on Form 8849. Filing my 2012 taxes See the employment and excise tax returns for more information. Filing my 2012 taxes Self-employment tax rule for disregarded entity LLCs. Filing my 2012 taxes   An individual owner of a single-member LLC classified as a disregarded entity is not an employee of the LLC. Filing my 2012 taxes Instead, the owner is subject to tax on the net earnings from self-employment of the LLC which is treated in the same manner as a sole-proprietorship. Filing my 2012 taxes Example 3. Filing my 2012 taxes LLC is a disregarded entity owned by Irene. Filing my 2012 taxes LLC has three employees (Kent, Patricia, and Tex) and pays wages. Filing my 2012 taxes LLC is treated as an entity separate from its owner for purposes of employment taxes. Filing my 2012 taxes For the wages paid to Kent, Patricia, and Tex, LLC is liable for income tax withholding, Federal Insurance Contributions Act (FICA) taxes, and Federal Unemployment Tax Act (FUTA) taxes. Filing my 2012 taxes In addition, LLC must file under its name and EIN the applicable employment tax returns; make timely employment tax deposits; and file with the Social Security Administration and furnish to LLC's employees (Kent, Patricia, and Tex) Forms W-2, Wage and Tax Statement. Filing my 2012 taxes Irene is self-employed for purposes of the self-employment tax. Filing my 2012 taxes Thus, Irene is subject to self-employment tax on her net earnings from self-employment with respect to LLC's activities. Filing my 2012 taxes Irene is not an employee of LLC for purposes of employment taxes. Filing my 2012 taxes Because LLC is treated as a sole proprietorship of Irene for income tax purposes, Irene must report the income and expenses from LLC on her Schedule C. Filing my 2012 taxes Irene will figure the tax due on her net earnings from self-employment on Schedule SE. Filing my 2012 taxes Irene can also deduct one-half of her self-employment tax on line 27 of her Form 1040. Filing my 2012 taxes Taxpayer identification number. Filing my 2012 taxes   For all income tax purposes, a single-member LLC classified as a disregarded entity must use the owner's social security number (SSN) or EIN. Filing my 2012 taxes This includes all information returns and reporting related to income tax. Filing my 2012 taxes For example, if a disregarded entity LLC that is owned by an individual is required to provide a Form W-9, Request for Taxpayer Identification Number and Certification, the LLC must provide the owner's SSN or EIN, not the LLC's EIN. Filing my 2012 taxes   However, most new single-member LLCs classified as a disregarded entity will need to obtain an EIN for the LLC. Filing my 2012 taxes An LLC will need an EIN if it has any employees or if it will be required to file any of the excise tax forms listed above (see Employment tax and certain excise taxes earlier). Filing my 2012 taxes See Form SS-4, Application for Employer Identification Number, for information on applying for an EIN. Filing my 2012 taxes Change in default classification. Filing my 2012 taxes   If a single-member LLC classified as a disregarded entity for income tax purposes acquires an additional member, it becomes a partnership under Regulations section 301. Filing my 2012 taxes 7701-3(f)(2). Filing my 2012 taxes However, if the LLC has made an election to be classified as a corporation (discussed later) and that elective classification is in effect at the time of the change in membership, the default classification as a partnership will not apply. Filing my 2012 taxes   Other tax consequences of a change in membership, such as recognition of gain or loss, are determined by the transactions through which an interest in the LLC is acquired or disposed of. Filing my 2012 taxes If a disregarded entity that becomes a partnership as a result of an increase in the number of members makes an election to be classified as a corporation, the applicable deemed transactions discussed in Subsequent Elections, later, apply. Filing my 2012 taxes Example 4. Filing my 2012 taxes Bart, who is not related to Alain, buys 50% of Alain's interest in an LLC that is a disregarded entity for $5,000. Filing my 2012 taxes Alain does not contribute any portion of the $5,000 to the LLC. Filing my 2012 taxes Alain and Bart continue to operate the business of the LLC as co-owners of the LLC. Filing my 2012 taxes The LLC is converted to a partnership when the new member, Bart, buys an interest in the disregarded entity from the owner, Alain. Filing my 2012 taxes Bart's buying a 50% interest in Alain's ownership interest in the LLC is treated as Bart's buying a 50% interest in each of the LLC's assets, which are treated as owned directly by Alain for federal income tax purposes. Filing my 2012 taxes Immediately thereafter, Alain and Bart are treated as contributing their respective interests in those assets to a partnership in exchange for ownership interests in the partnership. Filing my 2012 taxes Alain recognizes gain or loss from the deemed sale to Bart of the 50% interest in the assets. Filing my 2012 taxes Neither Alain nor Bart recognizes any gain or loss as a result of the deemed contribution of the assets to the partnership. Filing my 2012 taxes Example 5. Filing my 2012 taxes Charles, who is not related to Danielle, contributes $10,000 to an LLC owned by Danielle for a 50% ownership interest in the LLC. Filing my 2012 taxes The LLC uses all of the contributed cash in its business. Filing my 2012 taxes Charles and Danielle continue to operate the business of the LLC as co-owners of the LLC. Filing my 2012 taxes The LLC is converted from a disregarded entity to a partnership when Charles contributes cash to the LLC. Filing my 2012 taxes Charles's contribution is treated as a contribution to a partnership in exchange for an ownership interest in the partnership. Filing my 2012 taxes Danielle is treated as contributing all of the assets of the LLC to the partnership in exchange for a partnership interest. Filing my 2012 taxes Neither Charles nor Danielle recognizes gain or loss as a result of the conversion of the disregarded entity to a partnership. Filing my 2012 taxes   For more details on the preceding two examples, see Revenue Ruling 99-5, 1999-6 I. Filing my 2012 taxes R. Filing my 2012 taxes B. Filing my 2012 taxes 8. Filing my 2012 taxes You can find Revenue Ruling 99-5 at www. Filing my 2012 taxes irs. Filing my 2012 taxes gov/pub/irs-irbs/irb99-06. Filing my 2012 taxes pdf. Filing my 2012 taxes LLCs Classified as Corporations An LLC with either a single member or more than one member can elect to be classified as a corporation rather than be classified as a partnership or disregarded entity under the default rules discussed earlier. Filing my 2012 taxes File Form 8832, Entity Classification Election, to elect classification as a C corporation. Filing my 2012 taxes File Form 2553, Election by a Small Business Corporation, to elect classification as an S corporation. Filing my 2012 taxes LLCs electing classification as an S corporation are not required to file Form 8832 to elect classification as a corporation before filing Form 2553. Filing my 2012 taxes By filing Form 2553, an LLC is deemed to have elected classification as a corporation in addition to the S corporation classification. Filing my 2012 taxes If the LLC elects to be classified as a corporation by filing Form 8832, a copy of the LLC's Form 8832 must be attached to the federal income tax return of each direct and indirect owner of the LLC for the tax year of the owner that includes the date on which the election took effect. Filing my 2012 taxes Example 6. Filing my 2012 taxes Classification as a corporation without an S election. Filing my 2012 taxes Wanda and Sylvester are members of an LLC. Filing my 2012 taxes They agree that the LLC should be classified as a corporation but do not want to elect to have the LLC be treated as an S corporation. Filing my 2012 taxes The LLC must file Form 8832. Filing my 2012 taxes Example 7. Filing my 2012 taxes Classification as a corporation with an S election. Filing my 2012 taxes Evelyn and Carol are members of an LLC. Filing my 2012 taxes They agree that the LLC should be classified as an S corporation. Filing my 2012 taxes The LLC must file Form 2553 instead of Form 8832. Filing my 2012 taxes If the LLC is classified as a corporation, it must file a corporation income tax return. Filing my 2012 taxes If it is a C corporation, it is taxed on its taxable income and distributions to the members are includible in the members' gross income to the extent of the corporation's earnings and profits (double taxation). Filing my 2012 taxes If it is an S corporation, the corporation is generally not subject to any income tax and the income, deductions, gains, losses, and credits of the corporation “pass through” to the members. Filing my 2012 taxes Corporations generally file either: Form 1120, U. Filing my 2012 taxes S. Filing my 2012 taxes Corporation Income Tax Return; or Form 1120S, U. Filing my 2012 taxes S. Filing my 2012 taxes Income Tax Return for an S Corporation. Filing my 2012 taxes For more information on the income taxation of corporations and their shareholders, see Publication 542, Corporations. Filing my 2012 taxes For more information on the income taxation of S corporations and their shareholders, see the Instructions for Form 1120S, U. Filing my 2012 taxes S. Filing my 2012 taxes Income Tax Return for an S Corporation. Filing my 2012 taxes Subsequent Elections An LLC can elect to change its classification. Filing my 2012 taxes Generally, once an LLC has elected to change its classification, it cannot elect again to change it classification during the 60 months after the effective date of the election. Filing my 2012 taxes An election by a newly formed LLC that is effective on the date of formation is not considered a change for purposes of this limitation. Filing my 2012 taxes For more information and exceptions, see Regulations section 301. Filing my 2012 taxes 7701-3(c) and the Form 8832 instructions. Filing my 2012 taxes An election to change classification can have significant tax consequences based on the following transactions that are deemed to occur as a result of the election. Filing my 2012 taxes Partnership to corporation. Filing my 2012 taxes   An election to change classification from a partnership to a corporation will be treated as if the partnership contributed all of its assets and liabilities to the corporation in exchange for stock and the partnership then immediately liquidated by distributing the stock to its partners. Filing my 2012 taxes   For more information, see Partnership Distributions in Publication 541 and Property Exchanged for Stock in Publication 542. Filing my 2012 taxes Corporation to partnership. Filing my 2012 taxes   An election to change classification from a corporation to a partnership will be treated as if the corporation distributed all of its assets and liabilities to its shareholders in liquidation and the shareholders then immediately contributed all of the distributed assets and liabilities to a new partnership. Filing my 2012 taxes   For more information, see Contribution of Property in Publication 541 and Distributions to Shareholders in Publication 542. Filing my 2012 taxes Corporation to disregarded entity. Filing my 2012 taxes   An election to change classification from a corporation to a disregarded entity will be treated as if the corporation distributed all of its assets and liabilities to its single owner in liquidation. Filing my 2012 taxes   For more information, see Distributions to Shareholders in Publication 542. Filing my 2012 taxes Disregarded entity to corporation. Filing my 2012 taxes   An election to change classification from a disregarded entity to a corporation will be treated as if the owner of the disregarded entity contributed all of the assets and liabilities to the corporation in exchange for stock. Filing my 2012 taxes   For more information, see Property Exchanged for Stock in Publication 542. Filing my 2012 taxes How To Get More Information This section describes the help the IRS and other federal agencies offer to taxpayers who operate their own businesses. Filing my 2012 taxes Internal Revenue Service You can get help with unresolved tax issues, order free publications and forms, ask tax questions, and get information from the IRS in several ways. Filing my 2012 taxes By selecting the method that is best for you, you will have quick and easy access to tax help. Filing my 2012 taxes Contacting your Taxpayer Advocate. Filing my 2012 taxes   The Taxpayer Advocate Service (TAS) is an independent organization within the IRS whose employees assist taxpayers who are experiencing economic harm, who are seeking help in resolving tax problems that have not been resolved through normal channels, or who believe that an IRS system or procedure is not working as it should. Filing my 2012 taxes   You can contact the TAS by calling the TAS toll-free case intake line at 1-877-777-4778 or TTY/TDD 1-800-829-4059 to see if you are eligible for assistance. Filing my 2012 taxes You can also call or write to your local taxpayer advocate, whose phone number and address are listed in your local telephone directory and in Publication 1546, Taxpayer Advocate Service — Your Voice at the IRS. Filing my 2012 taxes You can file Form 911, Request for Taxpayer Advocate Service Assistance (And Application for Taxpayer Assistance Order), or ask an IRS employee to complete it on your behalf. Filing my 2012 taxes For more information, go to www. Filing my 2012 taxes irs. Filing my 2012 taxes gov/advocate. Filing my 2012 taxes Low Income Taxpayer Clinics (LITCs). Filing my 2012 taxes   LITCs are independent organizations that provide low income taxpayers with representation in federal tax controversies with the IRS for free or for a nominal charge. Filing my 2012 taxes The clinics also provide tax education and outreach for taxpayers with limited English proficiency or who speak English as a second language. Filing my 2012 taxes Publication 4134, Low Income Taxpayer Clinic List, provides information on clinics in your area. Filing my 2012 taxes It is available at www. Filing my 2012 taxes irs. Filing my 2012 taxes gov or at your local IRS office. Filing my 2012 taxes Small business workshops. Filing my 2012 taxes   Small business workshops are designed to help the small business owner understand and fulfill their federal tax responsibilities. Filing my 2012 taxes Workshops are sponsored and presented by IRS partners who are federal tax specialists. Filing my 2012 taxes Workshop topics vary from a general overview of taxes to more specific topics such as recordkeeping and retirement plans. Filing my 2012 taxes Although most are free, some workshops have fees associated with them. Filing my 2012 taxes Any fees charged for a workshop are paid to the sponsoring organization, not the IRS. Filing my 2012 taxes   For more information, visit www. Filing my 2012 taxes irs. Filing my 2012 taxes gov/businesses/small. Filing my 2012 taxes Subscribe to e-news for small businesses. Filing my 2012 taxes   Join the e-News for Small Businesses mailing list to receive updates, reminders, and other information useful to small business owners and self employed individuals. Filing my 2012 taxes Visit the website at www. Filing my 2012 taxes irs. Filing my 2012 taxes gov/businesses/small and click on “Subscribe to e-News. Filing my 2012 taxes ” Free tax services. Filing my 2012 taxes   To find out what services are available, get Publication 910, IRS Guide to Free Tax Services. Filing my 2012 taxes It contains a list of free tax publications and describes other free tax information services, including tax education and assistance programs and a list of TeleTax topics. Filing my 2012 taxes   Accessible versions of IRS published products are available on request in a variety of alternative formats for people with disabilities. Filing my 2012 taxes Internet. Filing my 2012 taxes You can access the IRS website at www. Filing my 2012 taxes irs. Filing my 2012 taxes gov 24 hours a day, 7 days a week, to: E-file your return. Filing my 2012 taxes Find out about commercial tax preparation and e-file services available free to eligible taxpayers. Filing my 2012 taxes Check the status of your refund. Filing my 2012 taxes Go to www. Filing my 2012 taxes irs. Filing my 2012 taxes gov and click on Where's My Refund. Filing my 2012 taxes Wait at least 72 hours after the IRS acknowledges receipt of your e-filed return, or 3 to 4 weeks after mailing a paper return. Filing my 2012 taxes If you filed Form 8379 with your return, wait 14 weeks (11 weeks if you filed electronically). Filing my 2012 taxes Have your tax return available so you can provide your social security number, your filing status, and the exact whole dollar amount of your refund. Filing my 2012 taxes Download forms, instructions, and publications. Filing my 2012 taxes Order IRS products online. Filing my 2012 taxes Research your tax questions online. Filing my 2012 taxes Search publications online by topic or keyword. Filing my 2012 taxes View Internal Revenue Bulletins (IRBs) published in the last few years. Filing my 2012 taxes Figure your withholding allowances using the withholding calculator online at www. Filing my 2012 taxes irs. Filing my 2012 taxes gov/individuals. Filing my 2012 taxes Determine if Form 6251 must be filed using our Alternative Minimum Tax (AMT) Assistant. Filing my 2012 taxes Sign up to receive local and national tax news by email. Filing my 2012 taxes Get information on starting and operating a small business. Filing my 2012 taxes Phone. Filing my 2012 taxes Many services are available by phone. Filing my 2012 taxes Ordering forms, instructions, and publications. Filing my 2012 taxes Call 1-800-829-3676 to order current-year forms, instructions, and publications, and prior-year forms and instructions. Filing my 2012 taxes You should receive your order within 10 days. Filing my 2012 taxes Asking tax questions. Filing my 2012 taxes Call the IRS with your tax questions at 1-800-829-1040. Filing my 2012 taxes Solving problems. Filing my 2012 taxes You can get face-to-face help solving tax problems every business day in IRS Taxpayer Assistance Centers. Filing my 2012 taxes An employee can explain IRS letters, request adjustments to your account, or help you set up a payment plan. Filing my 2012 taxes Call your local Taxpayer Assistance Center for an appointment. Filing my 2012 taxes To find the number, go to www. Filing my 2012 taxes irs. Filing my 2012 taxes gov/localcontacts or look in the phone book under United States Government, Internal Revenue Service. Filing my 2012 taxes TTY/TDD equipment. Filing my 2012 taxes If you have access to TTY/TDD equipment, call 1-800-829-4059 to ask tax questions or to order forms and publications. Filing my 2012 taxes TeleTax topics. Filing my 2012 taxes Call 1-800-829-4477 to listen to pre-recorded messages covering various tax topics. Filing my 2012 taxes Refund information. Filing my 2012 taxes To check the status of your 2009 refund, call 1-800-829-1954 during business hours or 1-800-829-4477 (automated refund information 24 hours a day, 7 days a week). Filing my 2012 taxes Wait at least 72 hours after the IRS acknowledges receipt of your e-filed return, or 3 to 4 weeks after mailing a paper return. Filing my 2012 taxes If you filed Form 8379 with your return, wait 14 weeks (11 weeks if you filed electronically). Filing my 2012 taxes Have your 2009 tax return available so you can provide your social security number, your filing status, and the exact whole dollar amount of your refund. Filing my 2012 taxes Refunds are sent out weekly on Fridays. Filing my 2012 taxes If you check the status of your refund and are not given the date it will be issued, please wait until the next week before checking back. Filing my 2012 taxes Evaluating the quality of our telephone services. Filing my 2012 taxes To ensure IRS representatives give accurate, courteous, and professional answers, we use several methods to evaluate the quality of our telephone services. Filing my 2012 taxes One method is for a second IRS representative to listen in on or record random telephone calls. Filing my 2012 taxes Another is to ask some callers to complete a short survey at the end of the call. Filing my 2012 taxes Walk-in. Filing my 2012 taxes Many products and services are available on a walk-in basis. Filing my 2012 taxes Products. Filing my 2012 taxes You can walk in to many post offices, libraries, and IRS offices to pick up certain forms, instructions, and publications. Filing my 2012 taxes Some IRS offices, libraries, grocery stores, copy centers, city and county government offices, credit unions, and office supply stores have a collection of products available to print from a CD or photocopy from reproducible proofs. Filing my 2012 taxes Also, some IRS offices and libraries have the Internal Revenue Code, regulations, Internal Revenue Bulletins, and Cumulative Bulletins available for research purposes. Filing my 2012 taxes Services. Filing my 2012 taxes You can walk in to your local Taxpayer Assistance Center every business day for personal, face-to-face tax help. Filing my 2012 taxes An employee can explain IRS letters, request adjustments to your tax account, or help you set up a payment plan. Filing my 2012 taxes If you need to resolve a tax problem, have questions about how the tax law applies to your individual tax return, or you are more comfortable talking with someone in person, visit your local Taxpayer Assistance Center where you can spread out your records and talk with an IRS representative face-to-face. Filing my 2012 taxes No appointment is necessary—just walk in. Filing my 2012 taxes If you prefer, you can call your local Center and leave a message requesting an appointment to resolve a tax account issue. Filing my 2012 taxes A representative will call you back within 2 business days to schedule an in-person appointment at your convenience. Filing my 2012 taxes If you have an ongoing, complex tax account problem or a special need, such as a disability, an appointment can be requested. Filing my 2012 taxes All other issues will be handled without an appointment. Filing my 2012 taxes To find the number of your local office, go to www. Filing my 2012 taxes irs. Filing my 2012 taxes gov/localcontacts or look in the phone book under United States Government, Internal Revenue Service. Filing my 2012 taxes Mail. Filing my 2012 taxes You can send your order for forms, instructions, and publications to the address below. Filing my 2012 taxes You should receive a response within 10 days after your request is received. Filing my 2012 taxes Internal Revenue Service1201 N. Filing my 2012 taxes Mitsubishi MotorwayBloomington, IL 61705–6613 DVD for tax products. Filing my 2012 taxes You can order Publication 1796, IRS Tax Products DVD, and obtain: Current-year forms, instructions, and publications. Filing my 2012 taxes Prior-year forms, instructions, and publications. Filing my 2012 taxes Tax Map: an electronic research tool and finding aid. Filing my 2012 taxes Tax law frequently asked questions. Filing my 2012 taxes Tax Topics from the IRS telephone response system. Filing my 2012 taxes Internal Revenue Code—Title 26 of the U. Filing my 2012 taxes S. Filing my 2012 taxes Code. Filing my 2012 taxes Fill-in, print, and save features for most tax forms. Filing my 2012 taxes Internal Revenue Bulletins. Filing my 2012 taxes Toll-free and email technical support. Filing my 2012 taxes Two releases during the year. Filing my 2012 taxes – The first release will ship the beginning of January. Filing my 2012 taxes – The final release will ship the beginning of March. Filing my 2012 taxes Purchase the DVD from National Technical Information Service (NTIS) at www. Filing my 2012 taxes irs. Filing my 2012 taxes gov/cdorders for $30 (no handling fee) or call 1-877-CDFORMS (1-877-233-6767) toll free to buy the DVD for $30 (plus a $6 handling fee). Filing my 2012 taxes Small Business Administration The Small Business Administration (SBA) offers training and educational programs, counseling services, financial programs, and contract assistance for small business owners. Filing my 2012 taxes The SBA also has publications and videos on a variety of business topics. Filing my 2012 taxes The following briefly describes assistance provided by the SBA. Filing my 2012 taxes Small Business Development Centers (SBDCs). Filing my 2012 taxes   SBDCs provide counseling, training, and technical services to current and prospective small business owners who cannot afford the services of a private consultant. Filing my 2012 taxes Help is available when beginning, improving, or expanding a small business. Filing my 2012 taxes Business Information Centers (BICs). Filing my 2012 taxes   BICs offer a small business reference library, management video tapes, and computer technology to help plan a business. Filing my 2012 taxes BICs also offer one-on-one assistance. Filing my 2012 taxes Individuals who are in business or are interested in starting a business can use BICs as often as they wish at no charge. Filing my 2012 taxes Service Corps of Retired Executives (SCORE). Filing my 2012 taxes   SCORE provides small business counseling and training to current and prospective small business owners. Filing my 2012 taxes SCORE is made up of current and former business people who offer their expertise and knowledge to help people start, manage, and expand a small business. Filing my 2012 taxes SCORE also offers a variety of small business workshops. Filing my 2012 taxes    Internet. Filing my 2012 taxes You can visit the SBA website at www. Filing my 2012 taxes sba. Filing my 2012 taxes gov. Filing my 2012 taxes While visiting the SBA website, you can find a variety of information of interest to small business owners. Filing my 2012 taxes    Phone. Filing my 2012 taxes Call the SBA Answer Desk at 1-800-UASK-SBA (1-800-827-5722) for general information about programs available to assist small business owners. Filing my 2012 taxes    Walk-in. Filing my 2012 taxes You can walk in to a Small Business Development Center or Business Information Center to request assistance with your small business. Filing my 2012 taxes To find the location nearest you, visit the SBA website or call the SBA Answer Desk. Filing my 2012 taxes Other Federal Agencies Other federal agencies also publish publications and pamphlets to assist small businesses. Filing my 2012 taxes Most of these are available from the Superintendent of Documents at the Government Printing Office. Filing my 2012 taxes You can get information and order these publications and pamphlets in several ways. Filing my 2012 taxes Internet. Filing my 2012 taxes You can visit the GPO website at www. Filing my 2012 taxes access. Filing my 2012 taxes gpo. Filing my 2012 taxes gov. Filing my 2012 taxes Mail. Filing my 2012 taxes Write to the GPO at the following address. Filing my 2012 taxes Superintendent of DocumentsU. Filing my 2012 taxes S. Filing my 2012 taxes Government Printing OfficeP. Filing my 2012 taxes O. Filing my 2012 taxes Box 979050St. Filing my 2012 taxes Louis, MO 63917-9000 Phone. Filing my 2012 taxes Call the GPO toll-free at 1-866-512-1800 or at 202-512-1800 from the Washington, DC area. Filing my 2012 taxes Prev  Up  Next   Home   More Online Publications
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The Filing My 2012 Taxes

Filing my 2012 taxes 4. Filing my 2012 taxes   Interest Table of Contents Introduction Topics - This chapter discusses: Useful Items - You may want to see: Allocation of InterestOrder of funds spent. Filing my 2012 taxes Payments from checking accounts. Filing my 2012 taxes Amounts paid within 30 days. Filing my 2012 taxes Optional method for determining date of reallocation. Filing my 2012 taxes Interest on a segregated account. Filing my 2012 taxes How to report. Filing my 2012 taxes Interest You Can DeductStatement. Filing my 2012 taxes Expenses paid to obtain a mortgage. Filing my 2012 taxes Prepayment penalty. Filing my 2012 taxes De minimis OID. Filing my 2012 taxes Constant-yield method. Filing my 2012 taxes Loan or mortgage ends. Filing my 2012 taxes Interest You Cannot DeductPenalties. Filing my 2012 taxes Who is a key person? Exceptions for pre-June 1997 contracts. Filing my 2012 taxes Interest allocated to unborrowed policy cash value. Filing my 2012 taxes Capitalization of Interest When To Deduct InterestPrepaid interest. Filing my 2012 taxes Discounted loan. Filing my 2012 taxes Refunds of interest. Filing my 2012 taxes Prepaid interest. Filing my 2012 taxes Discounted loan. Filing my 2012 taxes Tax deficiency. Filing my 2012 taxes Related person. Filing my 2012 taxes Below-Market LoansLimit on forgone interest for gift loans of $100,000 or less. Filing my 2012 taxes Introduction This chapter discusses the tax treatment of business interest expense. Filing my 2012 taxes Business interest expense is an amount charged for the use of money you borrowed for business activities. Filing my 2012 taxes 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 my 2012 taxes Sch K-1 (Form 1120S) Shareholder's Share of Income, Deductions, Credits, etc. Filing my 2012 taxes 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 my 2012 taxes Allocation of Interest The rules for deducting interest vary, depending on whether the loan proceeds are used for business, personal, or investment activities. Filing my 2012 taxes 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 my 2012 taxes Allocate your interest expense to the following categories. Filing my 2012 taxes 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 my 2012 taxes You allocate loan proceeds by tracing disbursements to specific uses. Filing my 2012 taxes The easiest way to trace disbursements to specific uses is to keep the proceeds of a particular loan separate from any other funds. Filing my 2012 taxes Secured loan. Filing my 2012 taxes   The allocation of loan proceeds and the related interest is not generally affected by the use of property that secures the loan. Filing my 2012 taxes Example. Filing my 2012 taxes You secure a loan with property used in your business. Filing my 2012 taxes You use the loan proceeds to buy an automobile for personal use. Filing my 2012 taxes 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 my 2012 taxes    If the property that secures the loan is your home, you generally do not allocate the loan proceeds or the related interest. Filing my 2012 taxes The interest is usually deductible as qualified home mortgage interest, regardless of how the loan proceeds are used. Filing my 2012 taxes For more information, see Publication 936. Filing my 2012 taxes Allocation period. Filing my 2012 taxes   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 my 2012 taxes The date the loan is repaid. Filing my 2012 taxes The date the loan is reallocated to another use. Filing my 2012 taxes Proceeds not disbursed to borrower. Filing my 2012 taxes   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 my 2012 taxes This applies whether you pay for property, services, or anything else by incurring a loan, or you take property subject to a debt. Filing my 2012 taxes Proceeds deposited in borrower's account. Filing my 2012 taxes   Treat loan proceeds deposited in an account as property held for investment. Filing my 2012 taxes It does not matter whether the account pays interest. Filing my 2012 taxes Any interest you pay on the loan is investment interest expense. Filing my 2012 taxes If you withdraw the proceeds of the loan, you must reallocate the loan based on the use of the funds. Filing my 2012 taxes Example. Filing my 2012 taxes Celina, a calendar-year taxpayer, borrows $100,000 on January 4 and immediately uses the proceeds to open a checking account. Filing my 2012 taxes No other amounts are deposited in the account during the year and no part of the loan principal is repaid during the year. Filing my 2012 taxes On April 2, Celina uses $20,000 from the checking account for a passive activity expenditure. Filing my 2012 taxes On September 4, Celina uses an additional $40,000 from the account for personal purposes. Filing my 2012 taxes 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 my 2012 taxes 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 my 2012 taxes 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 my 2012 taxes Order of funds spent. Filing my 2012 taxes   Generally, you treat loan proceeds deposited in an account as used (spent) before either of the following amounts. Filing my 2012 taxes Any unborrowed amounts held in the same account. Filing my 2012 taxes Any amounts deposited after these loan proceeds. Filing my 2012 taxes Example. Filing my 2012 taxes On January 9, Olena opened a checking account, depositing $500 of the proceeds of Loan A and $1,000 of unborrowed funds. Filing my 2012 taxes The following table shows the transactions in her account during the tax year. Filing my 2012 taxes 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 my 2012 taxes 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 my 2012 taxes She treats the $800 used for an investment as made entirely from the proceeds of Loan C. Filing my 2012 taxes She treats the $600 used for personal purposes as made from the remaining $200 proceeds of Loan C and $400 of unborrowed funds. Filing my 2012 taxes For the periods during which loan proceeds are held in the account, Olena treats them as property held for investment. Filing my 2012 taxes Payments from checking accounts. Filing my 2012 taxes   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 my 2012 taxes You can treat checks written on the same day as written in any order. Filing my 2012 taxes Amounts paid within 30 days. Filing my 2012 taxes   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 my 2012 taxes This applies to any payment made within 30 days before or after the proceeds are received in cash or deposited in your account. Filing my 2012 taxes   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 my 2012 taxes 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 my 2012 taxes   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 my 2012 taxes Example. Filing my 2012 taxes Giovanni gets a loan of $1,000 on August 4 and receives the proceeds in cash. Filing my 2012 taxes 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 my 2012 taxes Also, Giovanni deposits his paycheck, deposits other loan proceeds, and pays his bills during the same period. Filing my 2012 taxes 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 my 2012 taxes 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 my 2012 taxes Optional method for determining date of reallocation. Filing my 2012 taxes   You can use the following method to determine the date loan proceeds are reallocated to another use. Filing my 2012 taxes 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 my 2012 taxes The first day of that month. Filing my 2012 taxes The date the loan proceeds are deposited in the account. Filing my 2012 taxes 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 my 2012 taxes Interest on a segregated account. Filing my 2012 taxes   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 my 2012 taxes When the interest earned is used up, any remaining payments are from loan proceeds. Filing my 2012 taxes Example. Filing my 2012 taxes You borrowed $20,000 and used the proceeds of this loan to open a new savings account. Filing my 2012 taxes When the account had earned interest of $867, you withdrew $20,000 for personal purposes. Filing my 2012 taxes 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 my 2012 taxes 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 my 2012 taxes 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 my 2012 taxes 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 my 2012 taxes Loan repayment. Filing my 2012 taxes   When you repay any part of a loan allocated to more than one use, treat it as being repaid in the following order. Filing my 2012 taxes Personal use. Filing my 2012 taxes Investments and passive activities (other than those included in (3)). Filing my 2012 taxes Passive activities in connection with a rental real estate activity in which you actively participate. Filing my 2012 taxes Former passive activities. Filing my 2012 taxes Trade or business use and expenses for certain low-income housing projects. Filing my 2012 taxes Line of credit (continuous borrowings). Filing my 2012 taxes   The following rules apply if you have a line of credit or similar arrangement. Filing my 2012 taxes Treat all borrowed funds on which interest accrues at the same fixed or variable rate as a single loan. Filing my 2012 taxes Treat borrowed funds or parts of borrowed funds on which interest accrues at different fixed or variable rates as different loans. Filing my 2012 taxes Treat these loans as repaid in the order shown on the loan agreement. Filing my 2012 taxes Loan refinancing. Filing my 2012 taxes   Allocate the replacement loan to the same uses to which the repaid loan was allocated. Filing my 2012 taxes Make the allocation only to the extent you use the proceeds of the new loan to repay any part of the original loan. Filing my 2012 taxes Debt-financed distribution. Filing my 2012 taxes   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 my 2012 taxes The manner in which you report the interest expense associated with the distributed debt proceeds depends on your use of those proceeds. Filing my 2012 taxes How to report. Filing my 2012 taxes   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 my 2012 taxes 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 my 2012 taxes If the proceeds were used in an investment activity, enter the interest on Form 4952. Filing my 2012 taxes If the proceeds are used for personal purposes, the interest is generally not deductible. Filing my 2012 taxes 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 my 2012 taxes Interest relates to your trade or business if you use the proceeds of the loan for a trade or business expense. Filing my 2012 taxes It does not matter what type of property secures the loan. Filing my 2012 taxes You can deduct interest on a debt only if you meet all the following requirements. Filing my 2012 taxes You are legally liable for that debt. Filing my 2012 taxes Both you and the lender intend that the debt be repaid. Filing my 2012 taxes You and the lender have a true debtor-creditor relationship. Filing my 2012 taxes Partial liability. Filing my 2012 taxes   If you are liable for part of a business debt, you can deduct only your share of the total interest paid or accrued. Filing my 2012 taxes Example. Filing my 2012 taxes You and your brother borrow money. Filing my 2012 taxes You are liable for 50% of the note. Filing my 2012 taxes You use your half of the loan in your business, and you make one-half of the loan payments. Filing my 2012 taxes You can deduct your half of the total interest payments as a business deduction. Filing my 2012 taxes Mortgage. Filing my 2012 taxes   Generally, mortgage interest paid or accrued on real estate you own legally or equitably is deductible. Filing my 2012 taxes 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 my 2012 taxes Statement. Filing my 2012 taxes   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 my 2012 taxes 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 my 2012 taxes A governmental unit is a person for purposes of furnishing the statement. Filing my 2012 taxes   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 my 2012 taxes You cannot deduct this amount. Filing my 2012 taxes For information on how to report this refund, see Refunds of interest, later in this chapter. Filing my 2012 taxes Expenses paid to obtain a mortgage. Filing my 2012 taxes   Certain expenses you pay to obtain a mortgage cannot be deducted as interest. Filing my 2012 taxes These expenses, which include mortgage commissions, abstract fees, and recording fees, are capital expenses. Filing my 2012 taxes If the property mortgaged is business or income-producing property, you can amortize the costs over the life of the mortgage. Filing my 2012 taxes Prepayment penalty. Filing my 2012 taxes   If you pay off your mortgage early and pay the lender a penalty for doing this, you can deduct the penalty as interest. Filing my 2012 taxes Interest on employment tax deficiency. Filing my 2012 taxes   Interest charged on employment taxes assessed on your business is deductible. Filing my 2012 taxes Original issue discount (OID). Filing my 2012 taxes   OID is a form of interest. Filing my 2012 taxes A loan (mortgage or other debt) generally has OID when its proceeds are less than its principal amount. Filing my 2012 taxes The OID is the difference between the stated redemption price at maturity and the issue price of the loan. Filing my 2012 taxes   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 my 2012 taxes 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 my 2012 taxes You generally deduct OID over the term of the loan. Filing my 2012 taxes Figure the amount to deduct each year using the constant-yield method, unless the OID on the loan is de minimis. Filing my 2012 taxes De minimis OID. Filing my 2012 taxes   The OID is de minimis if it is less than one-fourth of 1% (. Filing my 2012 taxes 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 my 2012 taxes   If the OID is de minimis, you can choose one of the following ways to figure the amount you can deduct each year. Filing my 2012 taxes On a constant-yield basis over the term of the loan. Filing my 2012 taxes On a straight-line basis over the term of the loan. Filing my 2012 taxes In proportion to stated interest payments. Filing my 2012 taxes In its entirety at maturity of the loan. Filing my 2012 taxes 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 my 2012 taxes Example. Filing my 2012 taxes On January 1, 2013, you took out a $100,000 discounted loan and received $98,500 in proceeds. Filing my 2012 taxes The loan will mature on January 1, 2023 (a 10-year term), and the $100,000 principal is payable on that date. Filing my 2012 taxes Interest of $10,000 is payable on January 1 of each year, beginning January 1, 2014. Filing my 2012 taxes The $1,500 OID on the loan is de minimis because it is less than $2,500 ($100,000 × . Filing my 2012 taxes 0025 × 10). Filing my 2012 taxes You choose to deduct the OID on a straight-line basis over the term of the loan. Filing my 2012 taxes Beginning in 2013, you can deduct $150 each year for 10 years. Filing my 2012 taxes Constant-yield method. Filing my 2012 taxes   If the OID is not de minimis, you must use the constant-yield method to figure how much you can deduct each year. Filing my 2012 taxes You figure your deduction for the first year using the following steps. Filing my 2012 taxes Determine the issue price of the loan. Filing my 2012 taxes Generally, this equals the proceeds of the loan. Filing my 2012 taxes If you paid points on the loan (as discussed later), the issue price generally is the difference between the proceeds and the points. Filing my 2012 taxes Multiply the result in (1) by the yield to maturity. Filing my 2012 taxes Subtract any qualified stated interest payments from the result in (2). Filing my 2012 taxes This is the OID you can deduct in the first year. Filing my 2012 taxes   To figure your deduction in any subsequent year, follow the above steps, except determine the adjusted issue price in step (1). Filing my 2012 taxes To get the adjusted issue price, add to the issue price any OID previously deducted. Filing my 2012 taxes Then follow steps (2) and (3) above. Filing my 2012 taxes   The yield to maturity is generally shown in the literature you receive from your lender. Filing my 2012 taxes If you do not have this information, consult your lender or tax advisor. Filing my 2012 taxes 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 my 2012 taxes Example. Filing my 2012 taxes 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 my 2012 taxes The yield to maturity on your loan is 10. Filing my 2012 taxes 2467%, compounded annually. Filing my 2012 taxes For 2013, you can deduct $93 [($98,500 × . Filing my 2012 taxes 102467) − $10,000]. Filing my 2012 taxes For 2014, you can deduct $103 [($98,593 × . Filing my 2012 taxes 102467) − $10,000]. Filing my 2012 taxes Loan or mortgage ends. Filing my 2012 taxes   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 my 2012 taxes A loan or mortgage may end due to a refinancing, prepayment, foreclosure, or similar event. Filing my 2012 taxes 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 my 2012 taxes See Interest paid with funds borrowed from original lender under Interest You Cannot Deduct, later. Filing my 2012 taxes Points. Filing my 2012 taxes   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 my 2012 taxes These charges are also called loan origination fees, maximum loan charges, discount points, or premium charges. Filing my 2012 taxes If any of these charges (points) are solely for the use of money, they are interest. Filing my 2012 taxes   Because points are prepaid interest, you generally cannot deduct the full amount in the year paid. Filing my 2012 taxes However, you can choose to fully deduct points in the year paid if you meet certain tests. Filing my 2012 taxes For exceptions to the general rule, see Publication 936. Filing my 2012 taxes The points reduce the issue price of the loan and result in original issue discount (OID), deductible as explained in the preceding discussion. Filing my 2012 taxes Partial payments on a nontax debt. Filing my 2012 taxes   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 my 2012 taxes You can deduct only the interest. Filing my 2012 taxes 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 my 2012 taxes Installment purchase. Filing my 2012 taxes   If you make an installment purchase of business property, the contract between you and the seller generally provides for the payment of interest. Filing my 2012 taxes 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 my 2012 taxes The amount recharacterized as interest reduces your basis in the property and increases your interest expense. Filing my 2012 taxes For more information on installment sales and unstated interest, see Publication 537. Filing my 2012 taxes Interest You Cannot Deduct Certain interest payments cannot be deducted. Filing my 2012 taxes In addition, certain other expenses that may seem to be interest but are not, cannot be deducted as interest. Filing my 2012 taxes You cannot currently deduct interest that must be capitalized, and you generally cannot deduct personal interest. Filing my 2012 taxes Interest paid with funds borrowed from original lender. Filing my 2012 taxes   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 my 2012 taxes You can deduct the interest expense once you start making payments on the new loan. Filing my 2012 taxes   When you make a payment on the new loan, you first apply the payment to interest and then to the principal. Filing my 2012 taxes 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 my 2012 taxes Capitalized interest. Filing my 2012 taxes   You cannot currently deduct interest you are required to capitalize under the uniform capitalization rules. Filing my 2012 taxes See Capitalization of Interest, later. Filing my 2012 taxes 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 my 2012 taxes Add this interest to the basis of the property. Filing my 2012 taxes Commitment fees or standby charges. Filing my 2012 taxes   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 my 2012 taxes You may be able to deduct them as business expenses. Filing my 2012 taxes   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 my 2012 taxes See Capitalization of Interest, later. Filing my 2012 taxes Interest on income tax. Filing my 2012 taxes   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 my 2012 taxes Treat this interest as a business deduction only in figuring a net operating loss deduction. Filing my 2012 taxes Penalties. Filing my 2012 taxes   Penalties on underpaid deficiencies and underpaid estimated tax are not interest. Filing my 2012 taxes You cannot deduct them. Filing my 2012 taxes Generally, you cannot deduct any fines or penalties. Filing my 2012 taxes Interest on loans with respect to life insurance policies. Filing my 2012 taxes   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 my 2012 taxes   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 my 2012 taxes 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 my 2012 taxes Who is a key person?   A key person is an officer or 20% owner. Filing my 2012 taxes However, the number of individuals you can treat as key persons is limited to the greater of the following. Filing my 2012 taxes Five individuals. Filing my 2012 taxes The lesser of 5% of the total officers and employees of the company or 20 individuals. Filing my 2012 taxes Exceptions for pre-June 1997 contracts. Filing my 2012 taxes   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 my 2012 taxes If the contract was purchased before June 21, 1986, you can generally deduct the interest no matter who is covered by the contract. Filing my 2012 taxes Interest allocated to unborrowed policy cash value. Filing my 2012 taxes   Corporations and partnerships generally cannot deduct any interest expense allocable to unborrowed cash values of life insurance, annuity, or endowment contracts. Filing my 2012 taxes This rule applies to contracts issued after June 8, 1997, that cover someone other than an officer, director, employee, or 20% owner. Filing my 2012 taxes For more information, see section 264(f) of the Internal Revenue Code. Filing my 2012 taxes 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 my 2012 taxes The property must be produced by you for use in your trade or business or for sale to customers. Filing my 2012 taxes You cannot capitalize interest related to property that you acquire in any other manner. Filing my 2012 taxes Interest you paid or incurred during the production period must be capitalized if the property produced is designated property. Filing my 2012 taxes Designated property is any of the following. Filing my 2012 taxes Real property. Filing my 2012 taxes Tangible personal property with a class life of 20 years or more. Filing my 2012 taxes Tangible personal property with an estimated production period of more than 2 years. Filing my 2012 taxes 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 my 2012 taxes Property you produce. Filing my 2012 taxes   You produce property if you construct, build, install, manufacture, develop, improve, create, raise, or grow it. Filing my 2012 taxes Treat property produced for you under a contract as produced by you up to the amount you pay or incur for the property. Filing my 2012 taxes Carrying charges. Filing my 2012 taxes   Carrying charges include taxes you pay to carry or develop real estate or to carry, transport, or install personal property. Filing my 2012 taxes You can choose to capitalize carrying charges not subject to the uniform capitalization rules if they are otherwise deductible. Filing my 2012 taxes For more information, see chapter 7. Filing my 2012 taxes Capitalized interest. Filing my 2012 taxes   Treat capitalized interest as a cost of the property produced. Filing my 2012 taxes You recover your interest when you sell or use the property. Filing my 2012 taxes If the property is inventory, recover capitalized interest through cost of goods sold. Filing my 2012 taxes If the property is used in your trade or business, recover capitalized interest through an adjustment to basis, depreciation, amortization, or other method. Filing my 2012 taxes Partnerships and S corporations. Filing my 2012 taxes   The interest capitalization rules are applied first at the partnership or S corporation level. Filing my 2012 taxes 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 my 2012 taxes   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 my 2012 taxes You may also have to capitalize interest incurred by the partnership or S corporation for your own production costs. Filing my 2012 taxes 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 my 2012 taxes Additional information. Filing my 2012 taxes   The procedures for applying the uniform capitalization rules are beyond the scope of this publication. Filing my 2012 taxes For more information, see sections 1. Filing my 2012 taxes 263A-8 through 1. Filing my 2012 taxes 263A-15 of the regulations and Notice 88-99. Filing my 2012 taxes Notice 88-99 is in Cumulative Bulletin 1988-2. Filing my 2012 taxes 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 my 2012 taxes Cash method. Filing my 2012 taxes   Under the cash method, you can generally deduct only the interest you actually paid during the tax year. Filing my 2012 taxes You cannot deduct a promissory note you gave as payment because it is a promise to pay and not an actual payment. Filing my 2012 taxes Prepaid interest. Filing my 2012 taxes   You generally cannot deduct any interest paid before the year it is due. Filing my 2012 taxes Interest paid in advance can be deducted only in the tax year in which it is due. Filing my 2012 taxes Discounted loan. Filing my 2012 taxes   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 my 2012 taxes For more information, see Original issue discount (OID) under Interest You Can Deduct, earlier. Filing my 2012 taxes Refunds of interest. Filing my 2012 taxes   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 my 2012 taxes 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 my 2012 taxes Accrual method. Filing my 2012 taxes   Under an accrual method, you can deduct only interest that has accrued during the tax year. Filing my 2012 taxes Prepaid interest. Filing my 2012 taxes   See Prepaid interest, earlier. Filing my 2012 taxes Discounted loan. Filing my 2012 taxes   See Discounted loan, earlier. Filing my 2012 taxes Tax deficiency. Filing my 2012 taxes   If you contest a federal income tax deficiency, interest does not accrue until the tax year the final determination of liability is made. Filing my 2012 taxes If you do not contest the deficiency, then the interest accrues in the year the tax was asserted and agreed to by you. Filing my 2012 taxes   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 my 2012 taxes Related person. Filing my 2012 taxes   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 my 2012 taxes The relationship is determined as of the end of the tax year for which the interest would otherwise be deductible. Filing my 2012 taxes See section 267 of the Internal Revenue Code for more information. Filing my 2012 taxes 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 my 2012 taxes See Treatment of gift and demand loans, later, in this discussion. Filing my 2012 taxes 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 my 2012 taxes 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 my 2012 taxes A loan in exchange for a note that requires the payment of interest at the applicable federal rate. Filing my 2012 taxes An additional payment in an amount equal to the forgone interest. Filing my 2012 taxes 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 my 2012 taxes Forgone interest. Filing my 2012 taxes   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 my 2012 taxes Applicable federal rates are published by the IRS each month in the Internal Revenue Bulletin. Filing my 2012 taxes Internal Revenue Bulletins are available on the IRS web site at www. Filing my 2012 taxes irs. Filing my 2012 taxes gov/irb. Filing my 2012 taxes You can also contact an IRS office to get these rates. Filing my 2012 taxes Loans subject to the rules. Filing my 2012 taxes   The rules for below-market loans apply to the following. Filing my 2012 taxes Gift loans (below-market loans where the forgone interest is in the nature of a gift). Filing my 2012 taxes 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 my 2012 taxes Corporation-shareholder loans. Filing my 2012 taxes Tax avoidance loans (below-market loans where the avoidance of federal tax is one of the main purposes of the interest arrangement). Filing my 2012 taxes Loans to qualified continuing care facilities under a continuing care contract (made after October 11, 1985). Filing my 2012 taxes   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 my 2012 taxes Treatment of gift and demand loans. Filing my 2012 taxes   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 my 2012 taxes ) equal to the forgone interest on the loan. Filing my 2012 taxes You are then treated as transferring this amount back to the lender as interest. Filing my 2012 taxes These transfers are considered to occur annually, generally on December 31. Filing my 2012 taxes 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 my 2012 taxes The lender must report it as interest income. Filing my 2012 taxes Limit on forgone interest for gift loans of $100,000 or less. Filing my 2012 taxes   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 my 2012 taxes This limit applies if the outstanding loans between the lender and borrower total $100,000 or less. Filing my 2012 taxes If the borrower's net investment income is $1,000 or less, it is treated as zero. Filing my 2012 taxes 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 my 2012 taxes Treatment of term loans. Filing my 2012 taxes   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 my 2012 taxes ) on the date the loan is made. Filing my 2012 taxes 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 my 2012 taxes The same amount is treated as original issue discount on the loan. Filing my 2012 taxes See Original issue discount (OID) under Interest You Can Deduct, earlier. Filing my 2012 taxes Exceptions for loans of $10,000 or less. Filing my 2012 taxes   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 my 2012 taxes This exception applies only to the following. Filing my 2012 taxes Gift loans between individuals if the loan is not directly used to buy or carry income-producing assets. Filing my 2012 taxes Compensation-related loans or corporation-shareholder loans if the avoidance of any federal tax is not a principal purpose of the interest arrangement. Filing my 2012 taxes This exception does not apply to a term loan described in (2) above that was previously subject to the below-market loan rules. Filing my 2012 taxes Those rules will continue to apply even if the outstanding balance is reduced to $10,000 or less. Filing my 2012 taxes Exceptions for loans without significant tax effect. Filing my 2012 taxes   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 my 2012 taxes 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 my 2012 taxes Loans subsidized by a federal, state, or municipal government that are made available under a program of general application to the public. Filing my 2012 taxes Certain employee-relocation loans. Filing my 2012 taxes Certain loans to or from a foreign person, unless the interest income would be effectively connected with the conduct of a U. Filing my 2012 taxes S. Filing my 2012 taxes trade or business and not exempt from U. Filing my 2012 taxes S. Filing my 2012 taxes tax under an income tax treaty. Filing my 2012 taxes 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 my 2012 taxes 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 my 2012 taxes Consider all the following factors. Filing my 2012 taxes Whether items of income and deduction generated by the loan offset each other. Filing my 2012 taxes The amount of the items. Filing my 2012 taxes The cost of complying with the below-market loan provisions if they were to apply. Filing my 2012 taxes Any reasons, other than taxes, for structuring the transaction as a below-market loan. Filing my 2012 taxes Exception for loans to qualified continuing care facilities. Filing my 2012 taxes   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 my 2012 taxes A qualified continuing care facility is one or more facilities (excluding nursing homes) meeting the requirements listed below. Filing my 2012 taxes Designed to provide services under continuing care contracts (defined below). Filing my 2012 taxes Includes an independent living unit, and either an assisted living or nursing facility, or both. Filing my 2012 taxes Substantially all of the independent living unit residents are covered by continuing care contracts. Filing my 2012 taxes 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 my 2012 taxes The individual or individual's spouse must be entitled to use the facility for the rest of their life or lives. Filing my 2012 taxes 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 my 2012 taxes 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 my 2012 taxes For more information, see section 7872(h) of the Internal Revenue Code. Filing my 2012 taxes Sale or exchange of property. Filing my 2012 taxes   Different rules generally apply to a loan connected with the sale or exchange of property. Filing my 2012 taxes If the loan does not provide adequate stated interest, part of the principal payment may be considered interest. Filing my 2012 taxes However, there are exceptions that may require you to apply the below-market interest rate rules to these loans. Filing my 2012 taxes See Unstated Interest and Original Issue Discount (OID) in Publication 537. Filing my 2012 taxes More information. Filing my 2012 taxes   For more information on below-market loans, see section 7872 of the Internal Revenue Code and section 1. Filing my 2012 taxes 7872-5 of the regulations. Filing my 2012 taxes Prev  Up  Next   Home   More Online Publications