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Free File State Tax

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Free File State Tax

Free file state tax Part One -   The Income Tax Return The four chapters in this part provide basic information on the tax system. Free file state tax They take you through the first steps of filling out a tax return—such as deciding what your filing status is, how many exemptions you can take, and what form to file. Free file state tax They also discuss recordkeeping requirements, IRS e-file (electronic filing), certain penalties, and the two methods used to pay tax during the year: withholding and estimated tax. Free file state tax Table of Contents 1. Free file state tax   Filing InformationWhat's New Reminders Introduction Do I Have To File a Return?Individuals—In General Dependents Certain Children Under Age 19 or Full-Time Students Self-Employed Persons Aliens Who Should File Which Form Should I Use?Form 1040EZ Form 1040A Form 1040 Does My Return Have To Be on Paper?IRS e-file When Do I Have To File?Private delivery services. Free file state tax Extensions of Time To File How Do I Prepare My Return?When Do I Report My Income and Expenses? Social Security Number (SSN) Presidential Election Campaign Fund Computations Attachments Third Party Designee Signatures Paid Preparer Refunds Amount You Owe Gift To Reduce Debt Held by the Public Name and Address Where Do I File? What Happens After I File?What Records Should I Keep? Why Keep Records? Kinds of Records to Keep Basic Records How Long to Keep Records Refund Information Interest on Refunds Change of Address What If I Made a Mistake?Amended Returns and Claims for Refund Penalties Identity Theft 2. Free file state tax   Filing StatusWhat's New Introduction Useful Items - You may want to see: Marital StatusDivorced persons. Free file state tax Divorce and remarriage. Free file state tax Annulled marriages. Free file state tax Head of household or qualifying widow(er) with dependent child. Free file state tax Considered married. Free file state tax Same-sex marriage. Free file state tax Spouse died during the year. Free file state tax Married persons living apart. Free file state tax Single Married Filing JointlyFiling a Joint Return Married Filing SeparatelySpecial Rules Head of HouseholdConsidered Unmarried Keeping Up a Home Qualifying Person Qualifying Widow(er) With Dependent Child 3. Free file state tax   Personal Exemptions and DependentsWhat's New Introduction Useful Items - You may want to see: ExemptionsPersonal Exemptions Exemptions for Dependents Qualifying Child Qualifying Relative Phaseout of Exemptions Social Security Numbers for DependentsBorn and died in 2013. Free file state tax Taxpayer identification numbers for aliens. Free file state tax Taxpayer identification numbers for adoptees. Free file state tax 4. Free file state tax   Tax Withholding and Estimated TaxWhat's New for 2014 Reminders Introduction Useful Items - You may want to see: Tax Withholding for 2014Salaries and Wages Tips Taxable Fringe Benefits Sick Pay Pensions and Annuities Gambling Winnings Unemployment Compensation Federal Payments Backup Withholding Estimated Tax for 2014Who Does Not Have To Pay Estimated Tax Who Must Pay Estimated Tax How To Figure Estimated Tax When To Pay Estimated Tax How To Figure Each Payment How To Pay Estimated Tax Credit for Withholding and Estimated Tax for 2013Withholding Estimated Tax Underpayment Penalty for 2013 Prev  Up  Next   Home   More Online Publications
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The Free File State Tax

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