File your Taxes for Free!
  • Get your maximum refund*
  • 100% accurate calculations guaranteed*

TurboTax Federal Free Edition - File Taxes Online

Don't let filing your taxes get you down! We'll help make it as easy as possible. With e-file and direct deposit, there's no faster way to get your refund!

Approved TurboTax Affiliate Site. TurboTax and TurboTax Online, among others, are registered trademarks and/or service marks of Intuit Inc. in the United States and other countries. Other parties' trademarks or service marks are the property of the respective owners.


© 2012 - 2018 All rights reserved.

This is an Approved TurboTax Affiliate site. TurboTax and TurboTax Online, among other are registered trademarks and/or service marks of Intuit, Inc. in the United States and other countries. Other parties' trademarks or service marks are the property of the respective owners.
When discussing "Free e-file", note that state e-file is an additional fee. E-file fees do not apply to New York state returns. Prices are subject to change without notice. E-file and get your refund faster
*If you pay an IRS or state penalty or interest because of a TurboTax calculations error, we'll pay you the penalty and interest.
*Maximum Refund Guarantee - or Your Money Back: If you get a larger refund or smaller tax due from another tax preparation method, we'll refund the applicable TurboTax federal and/or state purchase price paid. TurboTax Federal Free Edition customers are entitled to payment of $14.99 and a refund of your state purchase price paid. Claims must be submitted within sixty (60) days of your TurboTax filing date and no later than 6/15/14. E-file, Audit Defense, Professional Review, Refund Transfer and technical support fees are excluded. This guarantee cannot be combined with the TurboTax Satisfaction (Easy) Guarantee. *We're so confident your return will be done right, we guarantee it. Accurate calculations guaranteed. If you pay an IRS or state penalty or interest because of a TurboTax calculations error, we'll pay you the penalty and interest.
https://turbotax.intuit.com/corp/guarantees.jsp

Pa 1040x

It 1040x2012 Tax AmendmentHow Do I File Taxes For 2011File 2011 Taxes For FreeTaxslayer Free For MilitaryHow To File Amended 2012 Tax Return1040 Ez 2011Print 1040ezFree 2012 Federal Tax FilingHr Block Taxes OnlineAmend 2011 Tax Return FreeTurbotax For Military1040ez Online Filing FreeFiling 1040ez FormFree State Tax Filing For Low IncomeIncome Tax Form 1040ez Instructions1040x Site Efile Com2014 1040 Ez FormHow To File 1040xForm 1040ez InstructionsIrs Free State Tax FilingCan I Stillfile My 2012 Taxes Online2007 Tax ReturnsTurbotax Free EditionStudent Tax Information2013 Income Tax Forms 1040 EzCopy 2011 TaxesAmmended Tax ReturnCan I Efile Form 1040x1040nr Ez SoftwareTurbo Tax 2011Print Free 1040ez Tax Form2010 Tax Form 1040xState Tax Preparation FreeH&r Block Free State Tax FilingFree Tax UsaTaxact Login Tax ReturnTax Forms 1040 Ez2040 Ez FormFree Tax Return Filing

Pa 1040x

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

Read the Consumer Action Handbook Online

Browse the Consumer Action Handbook by topic.

You can also order a print copy, explore the interactive version, download it (PDF), or download it by section.


Food and Grocery Shopping

Going Green

Telemarketing and Unwanted Mail

Utilities

The Pa 1040x

Pa 1040x 1. Pa 1040x   Importance of Records Table of Contents Introduction Topics - This chapter discusses: Useful Items - You may want to see: Benefits of Recordkeeping Kinds of Records To Keep How Long To Keep Records Introduction A farmer, like other taxpayers, must keep records to prepare an accurate income tax return and determine the correct amount of tax. Pa 1040x This chapter explains the benefits of keeping records, what kinds of records you must keep, and how long you must keep them for federal tax purposes. Pa 1040x Tax records are not the only type of records you need to keep for your farming business. Pa 1040x You should also keep records that measure your farm's financial performance. Pa 1040x This publication only discusses tax records. Pa 1040x The Farm Financial Standards Council has produced a publication that provides a detailed explanation of the recommendations of the Council for financial reporting and analysis. Pa 1040x For information on recordkeeping, you can purchase and download Financial Guidelines for Agricultural Producers at www. Pa 1040x ffsc. Pa 1040x org. Pa 1040x For more information, contact Countryside Marketing, Inc. Pa 1040x in the following manner. Pa 1040x Call 262-253-6902. Pa 1040x Send a fax to 262-253-6903. Pa 1040x Write to: Farm Financial Standards Council N78 W14573 Appleton Ave. Pa 1040x , #287 Menomonee Falls, WI 53051. Pa 1040x Topics - This chapter discusses: Benefits of recordkeeping Kinds of records to keep How long to keep records Useful Items - You may want to see: Publication 51 (Circular A), Agricultural Employer's Tax Guide 463 Travel, Entertainment, Gift, and Car Expenses See chapter 16 for information about getting publications. Pa 1040x Benefits of Recordkeeping Everyone in business, including farmers, must keep appropriate records. Pa 1040x Recordkeeping will help you do the following. Pa 1040x Monitor the progress of your farming business. Pa 1040x   You need records to monitor the progress of your farming business. Pa 1040x Records can show whether your business is improving, which items are selling, or what changes you need to make. Pa 1040x Records can help you make better decisions that may increase the likelihood of business success. Pa 1040x Prepare your financial statements. Pa 1040x   You need records to prepare accurate financial statements. Pa 1040x These include income (profit and loss) statements and balance sheets. Pa 1040x These statements can help you in dealing with your bank or creditors and help you to manage your farm business. Pa 1040x Identify source of receipts. Pa 1040x   You will receive money or property from many sources. Pa 1040x Your records can identify the source of your receipts. Pa 1040x You need this information to separate farm from nonfarm receipts and taxable from nontaxable income. Pa 1040x Keep track of deductible expenses. Pa 1040x   You may forget expenses when you prepare your tax return unless you record them when they occur. Pa 1040x Prepare your tax returns. Pa 1040x   You need records to prepare your tax return. Pa 1040x For example, your records must support the income, expenses, and credits you report. Pa 1040x Generally, these are the same records you use to monitor your farming business and prepare your financial statements. Pa 1040x Support items reported on tax returns. Pa 1040x   You must keep your business records available at all times for inspection by the IRS. Pa 1040x If the IRS examines any of your tax returns, you may be asked to explain the items reported. Pa 1040x A complete set of records will speed up the examination. Pa 1040x Kinds of Records To Keep Except in a few cases, the law does not require any specific kind of records. Pa 1040x You can choose any recordkeeping system suited to your farming business that clearly shows, for example, your income and expenses. Pa 1040x You should set up your recordkeeping system using an accounting method that clearly shows your income for your tax year. Pa 1040x See  chapter 2. Pa 1040x If you are in more than one business, you should keep a complete and separate set of records for each business. Pa 1040x A corporation should keep minutes of board of directors' meetings. Pa 1040x Your recordkeeping system should include a summary of your business transactions. Pa 1040x This summary is ordinarily made in accounting journals and ledgers. Pa 1040x For example, they must show your gross income, as well as your deductions and credits. Pa 1040x In addition, you must keep supporting documents. Pa 1040x Purchases, sales, payroll, and other transactions you have in your business generate supporting documents such as invoices and receipts. Pa 1040x These documents contain the information you need to record in your journals and ledgers. Pa 1040x It is important to keep these documents because they support the entries in your journals and ledgers and on your tax return. Pa 1040x Keep them in an orderly fashion and in a safe place. Pa 1040x For instance, organize them by year and type of income or expense. Pa 1040x Electronic records. Pa 1040x   All requirements that apply to hard copy books and records also apply to electronic storage systems that maintain tax books and records. Pa 1040x When you replace hard copy books and records, you must maintain the electronic storage systems for as long as they are material to the administration of tax law. Pa 1040x An electronic storage system is any system for preparing or keeping your records either by electronic imaging or by transfer to an electronic storage media. Pa 1040x The electronic storage system must index, store, preserve, retrieve and reproduce the electronically stored books and records in legible format. Pa 1040x All electronic storage systems must provide a complete and accurate record of your data that is accessible to the IRS. Pa 1040x Electronic storage systems are also subject to the same controls and retention guidelines as those imposed on your original hard copy books and records. Pa 1040x The original hard copy books and records may be destroyed provided that the electronic storage system has been tested to establish that the hard copy books and records are being reproduced in compliance with IRS requirements for an electronic storage system and procedures are established to ensure continued compliance with all applicable rules and regulations. Pa 1040x You still have the responsibility of retaining any other books and records that are required to be retained. Pa 1040x The IRS may test your electronic storage system, including the equipment used, indexing methodology, software and retrieval capabilities. Pa 1040x This test is not considered an examination and the results must be shared with you. Pa 1040x If your electronic storage system meets the requirements mentioned earlier, you will be in compliance. Pa 1040x If not, you may be subject to penalties for non-compliance, unless you continue to maintain your original hard copybooks and records in a manner that allows you and the IRS to determine your correct tax. Pa 1040x For details on electronic storage system requirements, see Rev. Pa 1040x Proc. Pa 1040x 97-22. Pa 1040x You can find Rev. Pa 1040x Proc. Pa 1040x 97-22 on page 9 of Internal Revenue Bulletin 1997-13 at  www. Pa 1040x irs. Pa 1040x gov/pub/irs-irbs/irb97-13. Pa 1040x pdf. Pa 1040x Travel, transportation, entertainment, and gift expenses. Pa 1040x   Specific recordkeeping rules apply to these expenses. Pa 1040x For more information, see Publication 463. Pa 1040x Employment taxes. Pa 1040x   There are specific employment tax records you must keep. Pa 1040x For a list, see Publication 51 (Circular A). Pa 1040x Excise taxes. Pa 1040x   See How To Claim a Credit or Refund in chapter 14 for the specific records you must keep to verify your claim for credit or refund of excise taxes on certain fuels. Pa 1040x Assets. Pa 1040x   Assets are the property, such as machinery and equipment, you own and use in your business. Pa 1040x You must keep records to verify certain information about your business assets. Pa 1040x You need records to figure your annual depreciation deduction and the gain or (loss) when you sell the assets. Pa 1040x Your records should show all the following. Pa 1040x When and how you acquired the asset. Pa 1040x Purchase price. Pa 1040x Cost of any improvements. Pa 1040x Section 179 deduction taken. Pa 1040x Deductions taken for depreciation. Pa 1040x Deductions taken for casualty losses, such as losses resulting from fires or storms. Pa 1040x How you used the asset. Pa 1040x When and how you disposed of the asset. Pa 1040x Selling price. Pa 1040x Expenses of sale. Pa 1040x   The following are examples of records that may show this information. Pa 1040x Purchase and sales invoices. Pa 1040x Real estate closing statements. Pa 1040x Canceled checks. Pa 1040x Bank statements. Pa 1040x Financial account statements as proof of payment. Pa 1040x   If you do not have a canceled check, you may be able to prove payment with certain financial account statements prepared by financial institutions. Pa 1040x These include account statements prepared for the financial institution by a third party. Pa 1040x These account statements must be legible. Pa 1040x The following table lists acceptable account statements. Pa 1040x IF payment is by. Pa 1040x . Pa 1040x . Pa 1040x THEN the statement must show the. Pa 1040x . Pa 1040x . Pa 1040x Check Check number. Pa 1040x Amount. Pa 1040x Payee's name. Pa 1040x Date the check amount was posted to the account by the financial institution. Pa 1040x Electronic funds  transfer Amount transferred. Pa 1040x Payee's name. Pa 1040x Date the transfer was posted to the account by the financial institution. Pa 1040x Credit card Amount charged. Pa 1040x Payee's name. Pa 1040x Transaction date. Pa 1040x    Proof of payment of an amount, by itself, does not establish you are entitled to a tax deduction. Pa 1040x You should also keep other documents, such as credit card sales slips and invoices, to show that you also incurred the cost. Pa 1040x Tax returns. Pa 1040x   Keep copies of your filed tax returns. Pa 1040x They help in preparing future tax returns and making computations if you file an amended return. Pa 1040x Keep copies of your information returns such as Form 1099, Schedule K-1, and Form W-2. Pa 1040x How Long To Keep Records You must keep your records as long as they may be needed for the administration of any provision of the Internal Revenue Code. Pa 1040x Keep records that support an item of income or a deduction appearing on a return until the period of limitations for the return runs out. Pa 1040x A period of limitations is the period of time after which no legal action can be brought. Pa 1040x Generally, that means you must keep your records for at least 3 years from when your tax return was due or filed or within 2 years of the date the tax was paid, whichever is later. Pa 1040x However, certain records must be kept for a longer period of time, as discussed below. Pa 1040x Employment taxes. Pa 1040x   If you have employees, you must keep all employment tax records for at least 4 years after the date the tax becomes due or is paid, whichever is later. Pa 1040x Assets. Pa 1040x   Keep records relating to property until the period of limitations expires for the year in which you dispose of the property in a taxable disposition. Pa 1040x You must keep these records to figure any depreciation, amortization, or depletion deduction and to figure your basis for computing gain or (loss) when you sell or otherwise dispose of the property. Pa 1040x   You may need to keep records relating to the basis of property longer than the period of limitation. Pa 1040x Keep those records as long as they are important in figuring the basis of the original or replacement property. Pa 1040x Generally, this means as long as you own the property and, after you dispose of it, for the period of limitations that applies to you. Pa 1040x For example, if you received property in a nontaxable exchange, you must keep the records for the old property, as well as for the new property, until the period of limitations expires for the year in which you dispose of the new property in a taxable disposition. Pa 1040x For more information on basis, see chapter 6. Pa 1040x Records for nontax purposes. Pa 1040x   When your records are no longer needed for tax purposes, do not discard them until you check to see if you have to keep them longer for other purposes. Pa 1040x For example, your insurance company or creditors may require you to keep them longer than the IRS does. Pa 1040x Prev  Up  Next   Home   More Online Publications