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2010 Tax Preparation

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2010 Tax Preparation

2010 tax preparation 8. 2010 tax preparation   Dividends and Other Distributions Table of Contents Reminder Introduction Useful Items - You may want to see: General InformationDividends not reported on Form 1099-DIV. 2010 tax preparation Reporting tax withheld. 2010 tax preparation Nominees. 2010 tax preparation Ordinary DividendsQualified Dividends Dividends Used to Buy More Stock Money Market Funds Capital Gain DistributionsBasis adjustment. 2010 tax preparation Nondividend DistributionsLiquidating Distributions Distributions of Stock and Stock Rights Other DistributionsInformation reporting requirement. 2010 tax preparation Alternative minimum tax treatment. 2010 tax preparation How To Report Dividend IncomeInvestment interest deducted. 2010 tax preparation Reminder Foreign-source income. 2010 tax preparation  If you are a U. 2010 tax preparation S. 2010 tax preparation citizen with dividend income from sources outside the United States (foreign-source income), you must report that income on your tax return unless it is exempt by U. 2010 tax preparation S. 2010 tax preparation law. 2010 tax preparation This is true whether you reside inside or outside the United States and whether or not you receive a Form 1099 from the foreign payer. 2010 tax preparation Introduction This chapter discusses the tax treatment of: Ordinary dividends, Capital gain distributions, Nondividend distributions, and Other distributions you may receive from a corporation or a mutual fund. 2010 tax preparation This chapter also explains how to report dividend income on your tax return. 2010 tax preparation Dividends are distributions of money, stock, or other property paid to you by a corporation or by a mutual fund. 2010 tax preparation You also may receive dividends through a partnership, an estate, a trust, or an association that is taxed as a corporation. 2010 tax preparation However, some amounts you receive that are called dividends are actually interest income. 2010 tax preparation (See Dividends that are actually interest under Taxable Interest in chapter 7. 2010 tax preparation ) Most distributions are paid in cash (or check). 2010 tax preparation However, distributions can consist of more stock, stock rights, other property, or services. 2010 tax preparation Useful Items - You may want to see: Publication 514 Foreign Tax Credit for Individuals 550 Investment Income and Expenses Form (and Instructions) Schedule B (Form 1040A or 1040) Interest and Ordinary Dividends General Information This section discusses general rules for dividend income. 2010 tax preparation Tax on unearned income of certain children. 2010 tax preparation   Part of a child's 2013 unearned income may be taxed at the parent's tax rate. 2010 tax preparation If it is, Form 8615, Tax for Certain Children Who Have Unearned Income, must be completed and attached to the child's tax return. 2010 tax preparation If not, Form 8615 is not required and the child's income is taxed at his or her own tax rate. 2010 tax preparation    Some parents can choose to include the child's interest and dividends on the parent's return if certain requirements are met. 2010 tax preparation Use Form 8814, Parents' Election To Report Child's Interest and Dividends, for this purpose. 2010 tax preparation   For more information about the tax on unearned income of children and the parents' election, see chapter 31. 2010 tax preparation Beneficiary of an estate or trust. 2010 tax preparation    Dividends and other distributions you receive as a beneficiary of an estate or trust are generally taxable income. 2010 tax preparation You should receive a Schedule K-1 (Form 1041), Beneficiary's Share of Income, Deductions, Credits, etc. 2010 tax preparation , from the fiduciary. 2010 tax preparation Your copy of Schedule K-1 (Form 1041) and its instructions will tell you where to report the income on your Form 1040. 2010 tax preparation Social security number (SSN) or individual taxpayer identification number (ITIN). 2010 tax preparation    You must give your SSN or ITIN to any person required by federal tax law to make a return, statement, or other document that relates to you. 2010 tax preparation This includes payers of dividends. 2010 tax preparation If you do not give your SSN or ITIN to the payer of dividends, you may have to pay a penalty. 2010 tax preparation For more information on SSNs and ITINs, see Social Security Number (SSN) in chapter 1. 2010 tax preparation Backup withholding. 2010 tax preparation   Your dividend income is generally not subject to regular withholding. 2010 tax preparation However, it may be subject to backup withholding to ensure that income tax is collected on the income. 2010 tax preparation Under backup withholding, the payer of dividends must withhold, as income tax, on the amount you are paid, applying the appropriate withholding rate. 2010 tax preparation   Backup withholding may also be required if the IRS has determined that you underreported your interest or dividend income. 2010 tax preparation For more information, see Backup Withholding in chapter 4. 2010 tax preparation Stock certificate in two or more names. 2010 tax preparation   If two or more persons hold stock as joint tenants, tenants by the entirety, or tenants in common, each person's share of any dividends from the stock is determined by local law. 2010 tax preparation Form 1099-DIV. 2010 tax preparation   Most corporations and mutual funds use Form 1099-DIV, Dividends and Distributions, to show you the distributions you received from them during the year. 2010 tax preparation Keep this form with your records. 2010 tax preparation You do not have to attach it to your tax return. 2010 tax preparation Dividends not reported on Form 1099-DIV. 2010 tax preparation   Even if you do not receive Form 1099-DIV, you must still report all your taxable dividend income. 2010 tax preparation For example, you may receive distributive shares of dividends from partnerships or S corporations. 2010 tax preparation These dividends are reported to you on Schedule K-1 (Form 1065), Partner's Share of Income, Deductions, Credits, etc. 2010 tax preparation , and Schedule K-1 (Form 1120S), Shareholder's Share of Income, Deductions, Credits, etc. 2010 tax preparation Reporting tax withheld. 2010 tax preparation   If tax is withheld from your dividend income, the payer must give you a Form 1099-DIV that indicates the amount withheld. 2010 tax preparation Nominees. 2010 tax preparation   If someone receives distributions as a nominee for you, that person should give you a Form 1099-DIV, which will show distributions received on your behalf. 2010 tax preparation Form 1099-MISC. 2010 tax preparation   Certain substitute payments in lieu of dividends or tax-exempt interest received by a broker on your behalf must be reported to you on Form 1099-MISC, Miscellaneous Income, or a similar statement. 2010 tax preparation See Reporting Substitute Payments under Short Sales in chapter 4 of Publication 550 for more information about reporting these payments. 2010 tax preparation Incorrect amount shown on a Form 1099. 2010 tax preparation   If you receive a Form 1099 that shows an incorrect amount (or other incorrect information), you should ask the issuer for a corrected form. 2010 tax preparation The new Form 1099 you receive will be marked “Corrected. 2010 tax preparation ” Dividends on stock sold. 2010 tax preparation   If stock is sold, exchanged, or otherwise disposed of after a dividend is declared but before it is paid, the owner of record (usually the payee shown on the dividend check) must include the dividend in income. 2010 tax preparation Dividends received in January. 2010 tax preparation   If a mutual fund (or other regulated investment company) or real estate investment trust (REIT) declares a dividend (including any exempt-interest dividend or capital gain distribution) in October, November, or December, payable to shareholders of record on a date in one of those months but actually pays the dividend during January of the next calendar year, you are considered to have received the dividend on December 31. 2010 tax preparation You report the dividend in the year it was declared. 2010 tax preparation Ordinary Dividends Ordinary (taxable) dividends are the most common type of distribution from a corporation or a mutual fund. 2010 tax preparation They are paid out of earnings and profits and are ordinary income to you. 2010 tax preparation This means they are not capital gains. 2010 tax preparation You can assume that any dividend you receive on common or preferred stock is an ordinary dividend unless the paying corporation or mutual fund tells you otherwise. 2010 tax preparation Ordinary dividends will be shown in box 1a of the Form 1099-DIV you receive. 2010 tax preparation Qualified Dividends Qualified dividends are the ordinary dividends subject to the same 0%, 15%, or 20% maximum tax rate that applies to net capital gain. 2010 tax preparation They should be shown in box 1b of the Form 1099-DIV you receive. 2010 tax preparation The maximum rate of tax on qualified dividends is: 0% on any amount that otherwise would be taxed at a 10% or 15% rate. 2010 tax preparation 15% on any amount that otherwise would be taxed at rates greater than 15% but less than 39. 2010 tax preparation 6%. 2010 tax preparation 20% on any amount that otherwise would be taxed at a 39. 2010 tax preparation 6% rate. 2010 tax preparation To qualify for the maximum rate, all of the following requirements must be met. 2010 tax preparation The dividends must have been paid by a U. 2010 tax preparation S. 2010 tax preparation corporation or a qualified foreign corporation. 2010 tax preparation (See Qualified foreign corporation , later. 2010 tax preparation ) The dividends are not of the type listed later under Dividends that are not qualified dividends . 2010 tax preparation You meet the holding period (discussed next). 2010 tax preparation Holding period. 2010 tax preparation   You must have held the stock for more than 60 days during the 121-day period that begins 60 days before the ex-dividend date. 2010 tax preparation The ex-dividend date is the first date following the declaration of a dividend on which the buyer of a stock is not entitled to receive the next dividend payment. 2010 tax preparation Instead, the seller will get the dividend. 2010 tax preparation   When counting the number of days you held the stock, include the day you disposed of the stock, but not the day you acquired it. 2010 tax preparation See the examples later. 2010 tax preparation Exception for preferred stock. 2010 tax preparation   In the case of preferred stock, you must have held the stock more than 90 days during the 181-day period that begins 90 days before the ex-dividend date if the dividends are due to periods totaling more than 366 days. 2010 tax preparation If the preferred dividends are due to periods totaling less than 367 days, the holding period in the previous paragraph applies. 2010 tax preparation Example 1. 2010 tax preparation You bought 5,000 shares of XYZ Corp. 2010 tax preparation common stock on July 9, 2013. 2010 tax preparation XYZ Corp. 2010 tax preparation paid a cash dividend of 10 cents per share. 2010 tax preparation The ex-dividend date was July 16, 2013. 2010 tax preparation Your Form 1099-DIV from XYZ Corp. 2010 tax preparation shows $500 in box 1a (ordinary dividends) and in box 1b (qualified dividends). 2010 tax preparation However, you sold the 5,000 shares on August 12, 2013. 2010 tax preparation You held your shares of XYZ Corp. 2010 tax preparation for only 34 days of the 121-day period (from July 10, 2013, through August 12, 2013). 2010 tax preparation The 121-day period began on May 17, 2013 (60 days before the ex-dividend date), and ended on September 14, 2013. 2010 tax preparation You have no qualified dividends from XYZ Corp. 2010 tax preparation because you held the XYZ stock for less than 61 days. 2010 tax preparation Example 2. 2010 tax preparation Assume the same facts as in Example 1 except that you bought the stock on July 15, 2013 (the day before the ex-dividend date), and you sold the stock on September 16, 2013. 2010 tax preparation You held the stock for 63 days (from July 16, 2013, through September 16, 2013). 2010 tax preparation The $500 of qualified dividends shown in box 1b of your Form 1099-DIV are all qualified dividends because you held the stock for 61 days of the 121-day period (from July 16, 2013, through September 14, 2013). 2010 tax preparation Example 3. 2010 tax preparation You bought 10,000 shares of ABC Mutual Fund common stock on July 9, 2013. 2010 tax preparation ABC Mutual Fund paid a cash dividend of 10 cents a share. 2010 tax preparation The ex-dividend date was July 16, 2013. 2010 tax preparation The ABC Mutual Fund advises you that the portion of the dividend eligible to be treated as qualified dividends equals 2 cents per share. 2010 tax preparation Your Form 1099-DIV from ABC Mutual Fund shows total ordinary dividends of $1,000 and qualified dividends of $200. 2010 tax preparation However, you sold the 10,000 shares on August 12, 2013. 2010 tax preparation You have no qualified dividends from ABC Mutual Fund because you held the ABC Mutual Fund stock for less than 61 days. 2010 tax preparation Holding period reduced where risk of loss is diminished. 2010 tax preparation   When determining whether you met the minimum holding period discussed earlier, you cannot count any day during which you meet any of the following conditions. 2010 tax preparation You had an option to sell, were under a contractual obligation to sell, or had made (and not closed) a short sale of substantially identical stock or securities. 2010 tax preparation You were grantor (writer) of an option to buy substantially identical stock or securities. 2010 tax preparation Your risk of loss is diminished by holding one or more other positions in substantially similar or related property. 2010 tax preparation   For information about how to apply condition (3), see Regulations section 1. 2010 tax preparation 246-5. 2010 tax preparation Qualified foreign corporation. 2010 tax preparation   A foreign corporation is a qualified foreign corporation if it meets any of the following conditions. 2010 tax preparation The corporation is incorporated in a U. 2010 tax preparation S. 2010 tax preparation possession. 2010 tax preparation The corporation is eligible for the benefits of a comprehensive income tax treaty with the United States that the Treasury Department determines is satisfactory for this purpose and that includes an exchange of information program. 2010 tax preparation For a list of those treaties, see Table 8-1. 2010 tax preparation The corporation does not meet (1) or (2) above, but the stock for which the dividend is paid is readily tradable on an established securities market in the United States. 2010 tax preparation See Readily tradable stock , later. 2010 tax preparation Exception. 2010 tax preparation   A corporation is not a qualified foreign corporation if it is a passive foreign investment company during its tax year in which the dividends are paid or during its previous tax year. 2010 tax preparation Readily tradable stock. 2010 tax preparation   Any stock (such as common, ordinary, or preferred) or an American depositary receipt in respect of that stock is considered to satisfy requirement (3) under Qualified foreign corporation , if it is listed on a national securities exchange that is registered under section 6 of the Securities Exchange Act of 1934 or on the Nasdaq Stock Market. 2010 tax preparation For a list of the exchanges that meet these requirements, see www. 2010 tax preparation sec. 2010 tax preparation gov/divisions/marketreg/mrexchanges. 2010 tax preparation shtml. 2010 tax preparation Dividends that are not qualified dividends. 2010 tax preparation   The following dividends are not qualified dividends. 2010 tax preparation They are not qualified dividends even if they are shown in box 1b of Form 1099-DIV. 2010 tax preparation Capital gain distributions. 2010 tax preparation Dividends paid on deposits with mutual savings banks, cooperative banks, credit unions, U. 2010 tax preparation S. 2010 tax preparation building and loan associations, U. 2010 tax preparation S. 2010 tax preparation savings and loan associations, federal savings and loan associations, and similar financial institutions. 2010 tax preparation (Report these amounts as interest income. 2010 tax preparation ) Dividends from a corporation that is a tax-exempt organization or farmer's cooperative during the corporation's tax year in which the dividends were paid or during the corporation's previous tax year. 2010 tax preparation Dividends paid by a corporation on employer securities held on the date of record by an employee stock ownership plan (ESOP) maintained by that corporation. 2010 tax preparation Dividends on any share of stock to the extent you are obligated (whether under a short sale or otherwise) to make related payments for positions in substantially similar or related property. 2010 tax preparation Payments in lieu of dividends, but only if you know or have reason to know the payments are not qualified dividends. 2010 tax preparation Payments shown in Form 1099-DIV, box 1b, from a foreign corporation to the extent you know or have reason to know the payments are not qualified dividends. 2010 tax preparation Table 8-1. 2010 tax preparation Income Tax Treaties Income tax treaties the United States has with the following countries satisfy requirement (2) under Qualified foreign corporation. 2010 tax preparation Australia Indonesia Romania Austria Ireland Russian Bangladesh Israel Federation Barbados Italy Slovak Belgium Jamaica Republic Bulgaria Japan Slovenia Canada Kazakhstan South Africa China Korea Spain Cyprus Latvia Sri Lanka Czech Lithuania Sweden Republic Luxembourg Switzerland Denmark Malta Thailand Egypt Mexico Trinidad and Estonia Morocco Tobago Finland Netherlands Tunisia France New Zealand Turkey Germany Norway Ukraine Greece Pakistan United Hungary Philippines Kingdom Iceland Poland Venezuela India Portugal     Dividends Used to Buy More Stock The corporation in which you own stock may have a dividend reinvestment plan. 2010 tax preparation This plan lets you choose to use your dividends to buy (through an agent) more shares of stock in the corporation instead of receiving the dividends in cash. 2010 tax preparation Most mutual funds also permit shareholders to automatically reinvest distributions in more shares in the fund, instead of receiving cash. 2010 tax preparation If you use your dividends to buy more stock at a price equal to its fair market value, you still must report the dividends as income. 2010 tax preparation If you are a member of a dividend reinvestment plan that lets you buy more stock at a price less than its fair market value, you must report as dividend income the fair market value of the additional stock on the dividend payment date. 2010 tax preparation You also must report as dividend income any service charge subtracted from your cash dividends before the dividends are used to buy the additional stock. 2010 tax preparation But you may be able to deduct the service charge. 2010 tax preparation See chapter 28 for more information about deducting expenses of producing income. 2010 tax preparation In some dividend reinvestment plans, you can invest more cash to buy shares of stock at a price less than fair market value. 2010 tax preparation If you choose to do this, you must report as dividend income the difference between the cash you invest and the fair market value of the stock you buy. 2010 tax preparation When figuring this amount, use the fair market value of the stock on the dividend payment date. 2010 tax preparation Money Market Funds Report amounts you receive from money market funds as dividend income. 2010 tax preparation Money market funds are a type of mutual fund and should not be confused with bank money market accounts that pay interest. 2010 tax preparation Capital Gain Distributions Capital gain distributions (also called capital gain dividends) are paid to you or credited to your account by mutual funds (or other regulated investment companies) and real estate investment trusts (REITs). 2010 tax preparation They will be shown in box 2a of the Form 1099-DIV you receive from the mutual fund or REIT. 2010 tax preparation Report capital gain distributions as long-term capital gains, regardless of how long you owned your shares in the mutual fund or REIT. 2010 tax preparation Undistributed capital gains of mutual funds and REITs. 2010 tax preparation    Some mutual funds and REITs keep their long-term capital gains and pay tax on them. 2010 tax preparation You must treat your share of these gains as distributions, even though you did not actually receive them. 2010 tax preparation However, they are not included on Form 1099-DIV. 2010 tax preparation Instead, they are reported to you in box 1a of Form 2439. 2010 tax preparation   Report undistributed capital gains (box 1a of Form 2439) as long-term capital gains on Schedule D (Form 1040), column (h), line 11. 2010 tax preparation   The tax paid on these gains by the mutual fund or REIT is shown in box 2 of Form 2439. 2010 tax preparation You take credit for this tax by including it on Form 1040, line 71, and checking box a on that line. 2010 tax preparation Attach Copy B of Form 2439 to your return, and keep Copy C for your records. 2010 tax preparation Basis adjustment. 2010 tax preparation   Increase your basis in your mutual fund, or your interest in a REIT, by the difference between the gain you report and the credit you claim for the tax paid. 2010 tax preparation Additional information. 2010 tax preparation   For more information on the treatment of distributions from mutual funds, see Publication 550. 2010 tax preparation Nondividend Distributions A nondividend distribution is a distribution that is not paid out of the earnings and profits of a corporation or a mutual fund. 2010 tax preparation You should receive a Form 1099-DIV or other statement showing the nondividend distribution. 2010 tax preparation On Form 1099-DIV, a nondividend distribution will be shown in box 3. 2010 tax preparation If you do not receive such a statement, you report the distribution as an ordinary dividend. 2010 tax preparation Basis adjustment. 2010 tax preparation   A nondividend distribution reduces the basis of your stock. 2010 tax preparation It is not taxed until your basis in the stock is fully recovered. 2010 tax preparation This nontaxable portion is also called a return of capital; it is a return of your investment in the stock of the company. 2010 tax preparation If you buy stock in a corporation in different lots at different times, and you cannot definitely identify the shares subject to the nondividend distribution, reduce the basis of your earliest purchases first. 2010 tax preparation   When the basis of your stock has been reduced to zero, report any additional nondividend distribution you receive as a capital gain. 2010 tax preparation Whether you report it as a long-term or short-term capital gain depends on how long you have held the stock. 2010 tax preparation See Holding Period in chapter 14. 2010 tax preparation Example. 2010 tax preparation You bought stock in 2000 for $100. 2010 tax preparation In 2003, you received a nondividend distribution of $80. 2010 tax preparation You did not include this amount in your income, but you reduced the basis of your stock to $20. 2010 tax preparation You received a nondividend distribution of $30 in 2013. 2010 tax preparation The first $20 of this amount reduced your basis to zero. 2010 tax preparation You report the other $10 as a long-term capital gain for 2013. 2010 tax preparation You must report as a long-term capital gain any nondividend distribution you receive on this stock in later years. 2010 tax preparation Liquidating Distributions Liquidating distributions, sometimes called liquidating dividends, are distributions you receive during a partial or complete liquidation of a corporation. 2010 tax preparation These distributions are, at least in part, one form of a return of capital. 2010 tax preparation They may be paid in one or more installments. 2010 tax preparation You will receive Form 1099-DIV from the corporation showing you the amount of the liquidating distribution in box 8 or 9. 2010 tax preparation For more information on liquidating distributions, see chapter 1 of Publication 550. 2010 tax preparation Distributions of Stock and Stock Rights Distributions by a corporation of its own stock are commonly known as stock dividends. 2010 tax preparation Stock rights (also known as “stock options”) are distributions by a corporation of rights to acquire the corporation's stock. 2010 tax preparation Generally, stock dividends and stock rights are not taxable to you, and you do not report them on your return. 2010 tax preparation Taxable stock dividends and stock rights. 2010 tax preparation   Distributions of stock dividends and stock rights are taxable to you if any of the following apply. 2010 tax preparation You or any other shareholder have the choice to receive cash or other property instead of stock or stock rights. 2010 tax preparation The distribution gives cash or other property to some shareholders and an increase in the percentage interest in the corporation's assets or earnings and profits to other shareholders. 2010 tax preparation The distribution is in convertible preferred stock and has the same result as in (2). 2010 tax preparation The distribution gives preferred stock to some common stock shareholders and common stock to other common stock shareholders. 2010 tax preparation The distribution is on preferred stock. 2010 tax preparation (The distribution, however, is not taxable if it is an increase in the conversion ratio of convertible preferred stock made solely to take into account a stock dividend, stock split, or similar event that would otherwise result in reducing the conversion right. 2010 tax preparation )   The term “stock” includes rights to acquire stock, and the term “shareholder” includes a holder of rights or of convertible securities. 2010 tax preparation If you receive taxable stock dividends or stock rights, include their fair market value at the time of distribution in your income. 2010 tax preparation Preferred stock redeemable at a premium. 2010 tax preparation   If you hold preferred stock having a redemption price higher than its issue price, the difference (the redemption premium) generally is taxable as a constructive distribution of additional stock on the preferred stock. 2010 tax preparation For more information, see chapter 1 of Publication 550. 2010 tax preparation Basis. 2010 tax preparation   Your basis in stock or stock rights received in a taxable distribution is their fair market value when distributed. 2010 tax preparation If you receive stock or stock rights that are not taxable to you, see Stocks and Bonds under Basis of Investment Property in chapter 4 of Publication 550 for information on how to figure their basis. 2010 tax preparation Fractional shares. 2010 tax preparation    You may not own enough stock in a corporation to receive a full share of stock if the corporation declares a stock dividend. 2010 tax preparation However, with the approval of the shareholders, the corporation may set up a plan in which fractional shares are not issued but instead are sold, and the cash proceeds are given to the shareholders. 2010 tax preparation Any cash you receive for fractional shares under such a plan is treated as an amount realized on the sale of the fractional shares. 2010 tax preparation Report this transaction on Form 8949, Sales and Other Dispositions of Capital Assets. 2010 tax preparation Enter your gain or loss, the difference between the cash you receive and the basis of the fractional shares sold, in column (h) of Schedule D (Form 1040) in Part I or Part II, whichever is appropriate. 2010 tax preparation    Report these transactions on Form 8949 with the correct box checked. 2010 tax preparation   For more information on Form 8949 and Schedule D (Form 1040), see chapter 4 of Publication 550. 2010 tax preparation Also see the Instructions for Form 8949 and the Instructions for Schedule D (Form 1040). 2010 tax preparation Example. 2010 tax preparation You own one share of common stock that you bought on January 3, 2004, for $100. 2010 tax preparation The corporation declared a common stock dividend of 5% on June 29, 2013. 2010 tax preparation The fair market value of the stock at the time the stock dividend was declared was $200. 2010 tax preparation You were paid $10 for the fractional-share stock dividend under a plan described in the discussion above. 2010 tax preparation You figure your gain or loss as follows: Fair market value of old stock $200. 2010 tax preparation 00 Fair market value of stock dividend (cash received) +10. 2010 tax preparation 00 Fair market value of old stock and stock dividend $210. 2010 tax preparation 00 Basis (cost) of old stock after the stock dividend (($200 ÷ $210) × $100) $95. 2010 tax preparation 24 Basis (cost) of stock dividend (($10 ÷ $210) × $100) + 4. 2010 tax preparation 76 Total $100. 2010 tax preparation 00 Cash received $10. 2010 tax preparation 00 Basis (cost) of stock dividend − 4. 2010 tax preparation 76 Gain $5. 2010 tax preparation 24 Because you had held the share of stock for more than 1 year at the time the stock dividend was declared, your gain on the stock dividend is a long-term capital gain. 2010 tax preparation Scrip dividends. 2010 tax preparation   A corporation that declares a stock dividend may issue you a scrip certificate that entitles you to a fractional share. 2010 tax preparation The certificate is generally nontaxable when you receive it. 2010 tax preparation If you choose to have the corporation sell the certificate for you and give you the proceeds, your gain or loss is the difference between the proceeds and the portion of your basis in the corporation's stock allocated to the certificate. 2010 tax preparation   However, if you receive a scrip certificate that you can choose to redeem for cash instead of stock, the certificate is taxable when you receive it. 2010 tax preparation You must include its fair market value in income on the date you receive it. 2010 tax preparation Other Distributions You may receive any of the following distributions during the year. 2010 tax preparation Exempt-interest dividends. 2010 tax preparation   Exempt-interest dividends you receive from a mutual fund or other regulated investment company, including those received from a qualified fund of funds in any tax year beginning after December 22, 2010, are not included in your taxable income. 2010 tax preparation Exempt-interest dividends should be shown in box 10 of Form 1099-DIV. 2010 tax preparation Information reporting requirement. 2010 tax preparation   Although exempt-interest dividends are not taxable, you must show them on your tax return if you have to file a return. 2010 tax preparation This is an information reporting requirement and does not change the exempt-interest dividends to taxable income. 2010 tax preparation Alternative minimum tax treatment. 2010 tax preparation   Exempt-interest dividends paid from specified private activity bonds may be subject to the alternative minimum tax. 2010 tax preparation See Alternative Minimum Tax (AMT) in chapter 30 for more information. 2010 tax preparation Dividends on insurance policies. 2010 tax preparation    Insurance policy dividends the insurer keeps and uses to pay your premiums are not taxable. 2010 tax preparation However, you must report as taxable interest income the interest that is paid or credited on dividends left with the insurance company. 2010 tax preparation    If dividends on an insurance contract (other than a modified endowment contract) are distributed to you, they are a partial return of the premiums you paid. 2010 tax preparation Do not include them in your gross income until they are more than the total of all net premiums you paid for the contract. 2010 tax preparation Report any taxable distributions on insurance policies on Form 1040, line 21. 2010 tax preparation Dividends on veterans' insurance. 2010 tax preparation   Dividends you receive on veterans' insurance policies are not taxable. 2010 tax preparation In addition, interest on dividends left with the Department of Veterans Affairs is not taxable. 2010 tax preparation Patronage dividends. 2010 tax preparation   Generally, patronage dividends you receive in money from a cooperative organization are included in your income. 2010 tax preparation   Do not include in your income patronage dividends you receive on: Property bought for your personal use, or Capital assets or depreciable property bought for use in your business. 2010 tax preparation But you must reduce the basis (cost) of the items bought. 2010 tax preparation If the dividend is more than the adjusted basis of the assets, you must report the excess as income. 2010 tax preparation   These rules are the same whether the cooperative paying the dividend is a taxable or tax-exempt cooperative. 2010 tax preparation Alaska Permanent Fund dividends. 2010 tax preparation    Do not report these amounts as dividends. 2010 tax preparation Instead, report these amounts on Form 1040, line 21; Form 1040A, line 13; or Form 1040EZ, line 3. 2010 tax preparation How To Report Dividend Income Generally, you can use either Form 1040 or Form 1040A to report your dividend income. 2010 tax preparation Report the total of your ordinary dividends on line 9a of Form 1040 or Form 1040A. 2010 tax preparation Report qualified dividends on line 9b of Form 1040 or Form 1040A. 2010 tax preparation If you receive capital gain distributions, you may be able to use Form 1040A or you may have to use Form 1040. 2010 tax preparation See Exceptions to filing Form 8949 and Schedule D (Form 1040) in chapter 16. 2010 tax preparation If you receive nondividend distributions required to be reported as capital gains, you must use Form 1040. 2010 tax preparation You cannot use Form 1040EZ if you receive any dividend income. 2010 tax preparation Form 1099-DIV. 2010 tax preparation   If you owned stock on which you received $10 or more in dividends and other distributions, you should receive a Form 1099-DIV. 2010 tax preparation Even if you do not receive Form 1099-DIV, you must report all your dividend income. 2010 tax preparation   See Form 1099-DIV for more information on how to report dividend income. 2010 tax preparation Form 1040A or 1040. 2010 tax preparation    You must complete Schedule B (Form 1040A or 1040), Part II, and attach it to your Form 1040A or 1040, if: Your ordinary dividends (Form 1099-DIV, box 1a) are more than $1,500, or You received, as a nominee, dividends that actually belong to someone else. 2010 tax preparation If your ordinary dividends are more than $1,500, you must also complete Schedule B (Form 1040A or 1040), Part III. 2010 tax preparation   List on Schedule B (Form 1040A or 1040), Part II, line 5, each payer's name and the ordinary dividends you received. 2010 tax preparation If your securities are held by a brokerage firm (in “street name”), list the name of the brokerage firm shown on Form 1099-DIV as the payer. 2010 tax preparation If your stock is held by a nominee who is the owner of record, and the nominee credited or paid you dividends on the stock, show the name of the nominee and the dividends you received or for which you were credited. 2010 tax preparation   Enter on line 6 the total of the amounts listed on line 5. 2010 tax preparation Also enter this total on line 9a of Form 1040A or 1040. 2010 tax preparation Qualified dividends. 2010 tax preparation   Report qualified dividends (Form 1099-DIV, box 1b) on line 9b of Form 1040 or Form 1040A. 2010 tax preparation The amount in box 1b is already included in box 1a. 2010 tax preparation Do not add the amount in box 1b to, or substract it from, the amount in box 1a. 2010 tax preparation   Do not include any of the following on line 9b. 2010 tax preparation Qualified dividends you received as a nominee. 2010 tax preparation See Nominees under How to Report Dividend Income in chapter 1 of Publication 550. 2010 tax preparation Dividends on stock for which you did not meet the holding period. 2010 tax preparation See Holding period , earlier under Qualified Dividends. 2010 tax preparation Dividends on any share of stock to the extent you are obligated (whether under a short sale or otherwise) to make related payments for positions in substantially similar or related property. 2010 tax preparation Payments in lieu of dividends, but only if you know or have reason to know the payments are not qualified dividends. 2010 tax preparation Payments shown in Form 1099-DIV, box 1b, from a foreign corporation to the extent you know or have reason to know the payments are not qualified dividends. 2010 tax preparation   If you have qualified dividends, you must figure your tax by completing the Qualified Dividends and Capital Gain Tax Worksheet in the Form 1040 or 1040A instructions or the Schedule D Tax Worksheet in the Schedule D (Form 1040) instructions, whichever applies. 2010 tax preparation Enter qualified dividends on line 2 of the worksheet. 2010 tax preparation Investment interest deducted. 2010 tax preparation   If you claim a deduction for investment interest, you may have to reduce the amount of your qualified dividends that are eligible for the 0%, 15%, or 20% tax rate. 2010 tax preparation Reduce it by the qualified dividends you choose to include in investment income when figuring the limit on your investment interest deduction. 2010 tax preparation This is done on the Qualified Dividends and Capital Gain Tax Worksheet or the Schedule D Tax Worksheet. 2010 tax preparation For more information about the limit on investment interest, see Investment expenses in chapter 23. 2010 tax preparation Expenses related to dividend income. 2010 tax preparation   You may be able to deduct expenses related to dividend income if you itemize your deductions on Schedule A (Form 1040). 2010 tax preparation See chapter 28 for general information about deducting expenses of producing income. 2010 tax preparation More information. 2010 tax preparation    For more information about how to report dividend income, see chapter 1 of Publication 550 or the instructions for the form you must file. 2010 tax preparation Prev  Up  Next   Home   More Online Publications
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Contact My Local Office in Indiana

Face-to-face Tax Help

IRS Taxpayer Assistance Centers (TACs) are your source for personal tax help when you believe your tax issue can only be handled face-to-face. No appointment is necessary.

Keep in mind, many questions can be resolved online without waiting in line. Through IRS.gov you can:
• Set up a payment plan.
• Get a transcript of your tax return.
• Make a payment.
• Check on your refund.
• Find answers to many of your tax questions.

We are now referring all requests for tax return preparation services to other available resources. You can take advantage of free tax preparation through Free File, Free File Fillable Forms or through a volunteer site in your community. To find the nearest volunteer site location or to get more information about Free File, go to the top of the page and enter “Free Tax Help” in the Search box.

If you have a tax account issues and feel that it requires talking with someone face-to-face, visit your local TAC.

Caution:  Many of our offices are located in Federal Office Buildings. These buildings may not allow visitors to bring in cell phones with camera capabilities.

Multilingual assistance is available in every office. Hours of operation are subject to change.

Before visiting your local office click on "Services Provided" in the chart below to see what services are available. Services are limited and not all services are available at every TAC office and may vary from site to site. You can get these services on a walk-in basis.

City Street Address Days/Hours of Service Telephone*
Bloomington 2017 S. Liberty Dr.
Bloomington, IN 47403

Monday-Friday - 8:30 a.m.-4:30 p.m.
(Closed for lunch 11:30 a.m. - 12:30 p.m.)

 

**This office will be open 9:00 a.m. - 3:30 p.m. on 4/2**

 

Services Provided

(812) 337-7600
Columbus 2425 Northpark Dr.
Columbus, IN 47203

Monday-Friday - 8:30 a.m.-4:30 p.m.
(Closed for lunch 11:30 a.m. - 12:30 p.m.)
 

Services Provided

(812) 379-7400
Evansville 7409 Eagle Crest Blvd.
Evansville, IN 47715

Monday-Friday - 8:30 a.m.-4:30 p.m.

 

**This office will be open until 6:00 p.m. on 4/14 & 4/15**

 

Services Provided

(812) 474-4800
Ft. Wayne 201 E. Rudisill Blvd.
Fort Wayne, IN 46806

Monday-Friday - 8:30 a.m.-4:30 p.m.
(Closed for lunch 12:30 p.m. - 1:30 p.m.)

 

Services Provided

(260) 458-5000
Indianapolis 575 N. Pennsylvania St.
Indianapolis, IN 46204

Monday-Friday - 8:30 a.m.-4:30 p.m.

 

**This office will be open until 6:00 p.m. on 4/14 & 4/15**

 

Services Provided

(317) 685-7500 
Lafayette  955 Mezzanine Drive
Suite B
Lafayette, IN 47905 

Monday-Friday - 8:30 a.m.-4:30 p.m.
(Closed for lunch 11:30 a.m. - 12:30 p.m.)

 

Services Provided

(765) 449-3880 
Merrillville  233 E. 84th Dr.
Merrillville, IN 46410 

Monday-Friday - 8:30 a.m.-4:30 p.m.


Services Provided

(219) 736-4378
 
Muncie  225 N. High St.
Muncie, IN 47305 

Monday-Friday 8:30 a.m.- 4:30 p.m. 
(Closed for lunch 12:30 p.m.- 1:30 p.m.)
 

Services Provided

(765) 747-5533 
South Bend  100 E Wayne St
South Bend, IN 46601 

Monday-Friday - 8:30 a.m.-4:30 p.m.  
 

Services Provided

(574) 236-8149 
Terre Haute  801 Wabash Ave. 
Terre Haute, IN 47807 

Monday-Friday - 8:30 a.m.-4:30 p.m.
(Closed for lunch 11:30 a.m. - 12:30 p.m.)

 

Services Provided

(812) 231-6521 

* Note: The phone numbers in the chart above are not toll-free for all locations. When you call, you will reach a recorded business message with information about office hours, locations and services provided in that office. If face-to-face assistance is not a priority for you, you may also get help with IRS letters or resolve tax account issues by phone, toll free at 1-800-829-1040 (individuals) or 1-800-829-4933 (businesses).

For information on where to file your tax return please see Where to File Addresses.

The Taxpayer Advocate Service: Call (317) 685-7840 in Indianapolis or 1-877-777-4778 elsewhere, or see  Publication 1546, The Taxpayer Advocate Service of the IRS. For further information, see  Tax Topic 104.

Partnerships

IRS and organizations all over the country are partnering to assist taxpayers. Through these partnerships, organizations are also achieving their own goals. These mutually beneficial partnerships are strengthening outreach efforts and bringing education and assistance to millions.

For more information about these programs for individuals and families, contact the Stakeholder Partnerships, Education and Communication Office at:

Internal Revenue Service
575 N. Pennsylvania St.
Room 573, Stop WI-665
Indianapolis, IN 46204

For more information about these programs for businesses, your local Stakeholder Liaison office establishes relationships with organizations representing small business and self-employed taxpayers. They provide information about the policies, practices and procedures the IRS uses to ensure compliance with the tax laws. To establish a relationship with us, use this list to find a contact in your state:

Stakeholder Liaison (SL) Phone Numbers for Organizations Representing Small Businesses and Self-employed Taxpayers.

Page Last Reviewed or Updated: 28-Mar-2014

The 2010 Tax Preparation

2010 tax preparation Publication 1212 - Main Content Table of Contents Definitions Debt Instruments on the OID List Debt Instruments Not on the OID List Information for Brokers and Other MiddlemenShort-Term Obligations Redeemed at Maturity Long-Term Debt Instruments Certificates of Deposit Bearer Bonds and Coupons Backup Withholding Information for Owners of OID Debt InstrumentsExceptions. 2010 tax preparation Adjustment for premium. 2010 tax preparation Adjustment for acquisition premium. 2010 tax preparation Adjustment for market discount. 2010 tax preparation Form 1099-OID How To Report OID Figuring OID on Long-Term Debt Instruments Figuring OID on Stripped Bonds and Coupons How To Get Tax HelpLow Income Taxpayer Clinics Definitions The following terms are used throughout this publication. 2010 tax preparation “Original issue discount” is defined first. 2010 tax preparation The other terms are listed alphabetically. 2010 tax preparation Original issue discount (OID). 2010 tax preparation   OID is a form of interest. 2010 tax preparation It is the excess of a debt instrument's stated redemption price at maturity over its issue price (acquisition price for a stripped bond or coupon). 2010 tax preparation Zero coupon bonds and debt instruments that pay no stated interest until maturity are examples of debt instruments that have OID. 2010 tax preparation Accrual period. 2010 tax preparation   An accrual period is an interval of time used to measure OID. 2010 tax preparation The length of an accrual period can be 6 months, a year, or some other period, depending on when the debt instrument was issued. 2010 tax preparation Acquisition premium. 2010 tax preparation   Acquisition premium is the excess of a debt instrument's adjusted basis immediately after purchase, including purchase at original issue, over the debt instrument's adjusted issue price at that time. 2010 tax preparation A debt instrument does not have acquisition premium, however, if the debt instrument was purchased at a premium. 2010 tax preparation See Premium, later. 2010 tax preparation Adjusted issue price. 2010 tax preparation   The adjusted issue price of a debt instrument at the beginning of an accrual period is used to figure the OID allocable to that period. 2010 tax preparation In general, the adjusted issue price at the beginning of the debt instrument's first accrual period is its issue price. 2010 tax preparation The adjusted issue price at the beginning of any subsequent accrual period is the sum of the issue price and all the OID includible in income before that accrual period minus any payment previously made on the debt instrument, other than a payment of qualified stated interest. 2010 tax preparation Debt instrument. 2010 tax preparation   The term “debt instrument” means any instrument or contractual arrangement that constitutes indebtedness under general principles of federal income tax law (including, for example, a bond, debenture, note, certificate, or other evidence of indebtedness). 2010 tax preparation It generally does not include an annuity contract. 2010 tax preparation Issue price. 2010 tax preparation   For debt instruments listed in Section I-A and Section I-B, the issue price generally is the initial offering price to the public (excluding bond houses and brokers) at which a substantial amount of these instruments was sold. 2010 tax preparation Market discount. 2010 tax preparation   Market discount arises when a debt instrument purchased in the secondary market has decreased in value since its issue date, generally because of an increase in interest rates. 2010 tax preparation An OID debt instrument has market discount if your adjusted basis in the debt instrument immediately after you acquired it (usually its purchase price) was less than the debt instrument's issue price plus the total OID that accrued before you acquired it. 2010 tax preparation The market discount is the difference between the issue price plus accrued OID and your adjusted basis. 2010 tax preparation Premium. 2010 tax preparation   A debt instrument is purchased at a premium if its adjusted basis immediately after purchase is greater than the total of all amounts payable on the debt instrument after the purchase date, other than qualified stated interest. 2010 tax preparation The premium is the excess of the adjusted basis over the payable amounts. 2010 tax preparation See Publication 550 for information on the tax treatment of bond premium. 2010 tax preparation Qualified stated interest. 2010 tax preparation   In general, qualified stated interest is stated interest that is unconditionally payable in cash or property (other than debt instruments of the issuer) at least annually over the term of the debt instrument at a single fixed rate. 2010 tax preparation Stated redemption price at maturity. 2010 tax preparation   A debt instrument's stated redemption price at maturity is the sum of all amounts (principal and interest) payable on the debt instrument other than qualified stated interest. 2010 tax preparation Yield to maturity (YTM). 2010 tax preparation   In general, the YTM is the discount rate that, when used in figuring the present value of all principal and interest payments, produces an amount equal to the issue price of the debt instrument. 2010 tax preparation The YTM is generally shown on the face of the debt instrument or in the literature you receive from your broker. 2010 tax preparation If you do not have this information, consult your broker, tax advisor, or the issuer. 2010 tax preparation Debt Instruments on the OID List The OID list on the IRS website can be used by brokers and other middlemen to prepare information returns. 2010 tax preparation If you own a listed debt instrument, you generally should not rely on the information in the OID list to determine (or compare) the OID to be reported on your tax return. 2010 tax preparation The OID amounts listed are figured without reference to the price or date at which you acquired the debt instrument. 2010 tax preparation For information about determining the OID to be reported on your tax return, see the instructions for figuring OID under Information for Owners of OID Debt Instruments, later. 2010 tax preparation The following discussions explain what information is contained in each section of the list. 2010 tax preparation Section I. 2010 tax preparation   This section contains publicly offered, long-term debt instruments. 2010 tax preparation Section I-A: Corporate Debt Instruments Issued Before 1985. 2010 tax preparation Section I-B: Corporate Debt Instruments Issued After 1984. 2010 tax preparation Section I-C: Inflation-Indexed Debt Instruments. 2010 tax preparation For each publicly offered debt instrument in Section I, the list contains the following information. 2010 tax preparation The name of the issuer. 2010 tax preparation The Committee on Uniform Security Identification Procedures (CUSIP) number. 2010 tax preparation The issue date. 2010 tax preparation The maturity date. 2010 tax preparation The issue price expressed as a percent of principal or of stated redemption price at maturity. 2010 tax preparation The annual stated or coupon interest rate. 2010 tax preparation (This rate is shown as 0. 2010 tax preparation 00 if no annual interest payments are provided. 2010 tax preparation ) The yield to maturity will be added to Section I-B for bonds issued after December 31, 2006. 2010 tax preparation The total OID accrued up to January 1 of a calendar year. 2010 tax preparation (This information is not available for every instrument. 2010 tax preparation ) For long-term debt instruments issued after July 1, 1982, the daily OID for the accrual periods falling in a calendar year and a subsequent year. 2010 tax preparation The total OID per $1,000 of principal or maturity value for a calendar year and a subsequent year. 2010 tax preparation Section II. 2010 tax preparation   This section contains stripped coupons and principal components of U. 2010 tax preparation S. 2010 tax preparation Treasury and Government-Sponsored Enterprise debt instruments. 2010 tax preparation These stripped components are available through the Department of the Treasury's Separate Trading of Registered Interest and Principal of Securities (STRIPS) program and government-sponsored enterprises such as the Resolution Funding Corporation. 2010 tax preparation This section also includes debt instruments backed by U. 2010 tax preparation S. 2010 tax preparation Treasury securities that represent ownership interests in those securities. 2010 tax preparation   The obligations listed in Section II are arranged by maturity date. 2010 tax preparation The amounts listed are the total OID for a calendar year per $1,000 of redemption price. 2010 tax preparation Section III. 2010 tax preparation   This section contains short-term discount obligations. 2010 tax preparation Section III-A: Short-Term U. 2010 tax preparation S. 2010 tax preparation Treasury Bills. 2010 tax preparation Section III-B: Federal Home Loan Banks. 2010 tax preparation Section III-C: Federal National Mortgage Association. 2010 tax preparation Section III-D: Federal Farm Credit Banks. 2010 tax preparation Section III-E: Federal Home Loan Mortgage Corporation. 2010 tax preparation Section III-F: Federal Agricultural Mortgage Corporation. 2010 tax preparation    Information that supplements Section III-A is available on the Internet at http://www. 2010 tax preparation treasurydirect. 2010 tax preparation gov/tdhome. 2010 tax preparation htm. 2010 tax preparation   The short-term obligations listed in this section are arranged by maturity date. 2010 tax preparation For each obligation, the list contains the CUSIP number, maturity date, issue date, issue price (expressed as a percent of principal), and discount to be reported as interest for a calendar year per $1,000 of redemption price. 2010 tax preparation Brokers and other middlemen should rely on the issue price information in Section III only if they are unable to determine the price actually paid by the owner. 2010 tax preparation Debt Instruments Not on the OID List The list of debt instruments discussed earlier does not contain the following items. 2010 tax preparation U. 2010 tax preparation S. 2010 tax preparation savings bonds. 2010 tax preparation Certificates of deposit and other face-amount certificates issued at a discount, including syndicated certificates of deposit. 2010 tax preparation Obligations issued by tax-exempt organizations. 2010 tax preparation OID debt instruments that matured or were entirely called by the issuer before the tables were posted on the IRS website. 2010 tax preparation Mortgage-backed securities and mortgage participation certificates. 2010 tax preparation Long-term OID debt instruments issued before May 28, 1969. 2010 tax preparation Short-term obligations, other than the obligations listed in Section III. 2010 tax preparation Debt instruments issued at a discount by states or their political subdivisions. 2010 tax preparation REMIC regular interests and CDOs. 2010 tax preparation Commercial paper and banker's acceptances issued at a discount. 2010 tax preparation Obligations issued at a discount by individuals. 2010 tax preparation Foreign obligations not traded in the United States and obligations not issued in the United States. 2010 tax preparation Information for Brokers and Other Middlemen The following discussions contain specific instructions for brokers and middlemen who hold or redeem a debt instrument for the owner. 2010 tax preparation In general, you must file a Form 1099 for the debt instrument if the interest or OID to be included in the owner's income for a calendar year totals $10 or more. 2010 tax preparation You also must file a Form 1099 if you were required to deduct and withhold tax, even if the interest or OID is less than $10. 2010 tax preparation See Backup Withholding, later. 2010 tax preparation If you must file a Form 1099, furnish a copy to the owner of the debt instrument by January 31 in the year it is due. 2010 tax preparation File all your Forms 1099 with the IRS, accompanied by Form 1096, by February 28 in the year it is due (March 31 if you file electronically). 2010 tax preparation Electronic payee statements. 2010 tax preparation   You can issue Form 1099-OID electronically with the consent of the recipient. 2010 tax preparation More information. 2010 tax preparation   For more information, including penalties for failure to file (or furnish) required information returns or statements, see the General Instructions for Certain Information Returns (Forms 1098, 1099, 3921, 3922, 5498, and W-2G) for the appropriate calendar year. 2010 tax preparation Short-Term Obligations Redeemed at Maturity If you redeem a short-term discount obligation for the owner at maturity, you must report the discount as interest on Form 1099-INT. 2010 tax preparation To figure the discount, use the purchase price shown on the owner's copy of the purchase confirmation receipt or similar record, or the price shown in your transaction records. 2010 tax preparation If you sell the obligation for the owner before maturity, you must file Form 1099-B to reflect the gross proceeds to the seller. 2010 tax preparation Do not report the accrued discount to the date of sale on either Form 1099-INT or Form 1099-OID. 2010 tax preparation If the owner's purchase price cannot be determined, figure the discount as if the owner had purchased the obligation at its original issue price. 2010 tax preparation A special rule is used to determine the original issue price for information reporting on U. 2010 tax preparation S. 2010 tax preparation Treasury bills (T-bills) listed in Section III-A. 2010 tax preparation Under this rule, you treat as the original issue price of the T-bill the noncompetitive (weighted average of accepted auction bids) discount price for the longest-maturity T-bill maturing on the same date as the T-bill being redeemed. 2010 tax preparation This noncompetitive discount price is the issue price (expressed as a percent of principal) shown in Section III-A. 2010 tax preparation A similar rule is used to figure the discount on short-term discount obligations issued by the organizations listed in Section III-B through Section III-F. 2010 tax preparation Example 1. 2010 tax preparation There are 13-week and 26-week T-bills maturing on the same date as the T-bill being redeemed. 2010 tax preparation The price actually paid by the owner cannot be established by owner or middleman records. 2010 tax preparation You treat as the issue price of the T-bill the noncompetitive discount price (expressed as a percent of principal) shown in Section III-A for a 26-week bill maturing on the same date as the T-bill redeemed. 2010 tax preparation The interest you report on Form 1099-INT is the OID (per $1,000 of principal) shown in Section III-A for that obligation. 2010 tax preparation Long-Term Debt Instruments If you hold a long-term OID debt instrument as a nominee for the true owner, you generally must file Form 1099-OID. 2010 tax preparation For this purpose, you can rely on Section I of the OID list to determine the following information. 2010 tax preparation Whether a debt instrument has OID. 2010 tax preparation The OID to be reported on the Form 1099-OID. 2010 tax preparation In general, you must report OID on publicly offered, long-term debt instruments listed in Section I. 2010 tax preparation You also can report OID on other long-term debt instruments. 2010 tax preparation Form 1099-OID. 2010 tax preparation   On Form 1099-OID for a calendar year show the following information. 2010 tax preparation Box 1. 2010 tax preparation The OID for the actual dates the owner held the debt instruments during a calendar year. 2010 tax preparation To determine this amount, see Figuring OID, next. 2010 tax preparation Box 2. 2010 tax preparation The qualified stated interest paid or credited during the calendar year. 2010 tax preparation Interest reported here is not reported on Form 1099-INT. 2010 tax preparation The qualified stated interest on Treasury inflation-protected securities may be reported on Form 1099-INT in box 3 instead. 2010 tax preparation Box 3. 2010 tax preparation Any interest or principal forfeited because of an early withdrawal that the owner can deduct from gross income. 2010 tax preparation Do not reduce the amounts in boxes 1 and 2 by the forfeiture. 2010 tax preparation Box 4. 2010 tax preparation Any backup withholding for this debt instrument. 2010 tax preparation Box 7. 2010 tax preparation The CUSIP number, if any. 2010 tax preparation If there is no CUSIP number, give a description of the debt instrument, including the abbreviation for the stock exchange, the abbreviation used by the stock exchange for the issuer, the coupon rate, and the year of maturity (for example, NYSE XYZ 12. 2010 tax preparation 50 2006). 2010 tax preparation If the issuer of the debt instrument is other than the payer, show the name of the issuer in this box. 2010 tax preparation Box 8. 2010 tax preparation The OID on a U. 2010 tax preparation S. 2010 tax preparation Treasury obligation for the part of the year the owner held the debt instrument. 2010 tax preparation Box 9. 2010 tax preparation Investment expenses passed on to holders of a single-class REMIC. 2010 tax preparation Boxes 10-12. 2010 tax preparation Use to report any state income tax withheld for this debt instrument. 2010 tax preparation Figuring OID. 2010 tax preparation   You can determine the OID on a long-term debt instrument by using either of the following. 2010 tax preparation Section I of the OID list. 2010 tax preparation The income tax regulations. 2010 tax preparation Using Section I. 2010 tax preparation   If the owner held the debt instrument for the entire calendar year, report the OID shown in Section I for the calendar year. 2010 tax preparation Because OID is listed for each $1,000 of stated redemption price at maturity, you must adjust the listed amount to reflect the debt instrument's actual stated redemption price at maturity. 2010 tax preparation For example, if the debt instrument's stated redemption price at maturity is $500, report one-half the listed OID. 2010 tax preparation   If the owner held the debt instrument for less than the entire calendar year, figure the OID to report as follows. 2010 tax preparation Look up the daily OID for the first accrual period in the calendar year during which the owner held the debt instrument. 2010 tax preparation Multiply the daily OID by the number of days the owner held the debt instrument during that accrual period. 2010 tax preparation Repeat steps (1) and (2) for any remaining accrual periods for the year during which the owner held the debt instrument. 2010 tax preparation Add the results in steps (2) and (3) to determine the owner's OID per $1,000 of stated redemption price at maturity. 2010 tax preparation If necessary, adjust the OID in (4) to reflect the debt instrument's stated redemption price at maturity. 2010 tax preparation Report the result on Form 1099-OID in box 1. 2010 tax preparation Using the income tax regulations. 2010 tax preparation   Instead of using Section I to figure OID, you can use the regulations under sections 1272 through 1275 of the Internal Revenue Code. 2010 tax preparation For example, under the regulations, you can use monthly accrual periods in figuring OID for a debt instrument issued after April 3, 1994, that provides for monthly payments. 2010 tax preparation (If you use Section I-B, the OID is figured using 6-month accrual periods. 2010 tax preparation )   For a general explanation of the rules for figuring OID under the regulations, see Figuring OID on Long-Term Debt Instruments under Information for Owners of OID Debt Instruments, later. 2010 tax preparation Certificates of Deposit If you hold a bank certificate of deposit (CD) as a nominee, you must determine whether the CD has OID and any OID includible in the income of the owner. 2010 tax preparation You must file an information return showing the reportable interest and OID, if any, on the CD. 2010 tax preparation These rules apply whether or not you sold the CD to the owner. 2010 tax preparation Report OID on a CD in the same way as OID on other debt instruments. 2010 tax preparation See Short-Term Obligations Redeemed at Maturity and Long-Term Debt Instruments, earlier. 2010 tax preparation Bearer Bonds and Coupons If a coupon from a bearer bond is presented to you for collection before the bond matures, you generally must report the interest on Form 1099-INT. 2010 tax preparation However, do not report the interest if either of the following apply. 2010 tax preparation You hold the bond as a nominee for the true owner. 2010 tax preparation The payee is a foreign person. 2010 tax preparation See Payments to foreign person under Backup Withholding, later. 2010 tax preparation Because you cannot assume the presenter of the coupon also owns the bond, you should not report OID on the bond on Form 1099-OID. 2010 tax preparation The coupon may have been “stripped” (separated) from the bond and separately purchased. 2010 tax preparation However, if a long-term bearer bond on the OID list is presented to you for redemption upon call or maturity, you should prepare a Form 1099-OID showing the OID for that calendar year, as well as any coupon interest payments collected at the time of redemption. 2010 tax preparation Backup Withholding If you report OID on Form 1099-OID or interest on Form 1099-INT for a calendar year, you may be required to apply backup withholding to the reportable payment at a rate of 28%. 2010 tax preparation The backup withholding is deducted at the time a cash payment is made. 2010 tax preparation See Pub. 2010 tax preparation 1281, Backup Withholding for Missing and Incorrect Name/TIN(s), for more information. 2010 tax preparation Backup withholding generally applies in the following situations. 2010 tax preparation The payee does not give you a taxpayer identification number (TIN). 2010 tax preparation The IRS notifies you that the payee gave an incorrect TIN. 2010 tax preparation The IRS notifies you that the payee is subject to backup withholding due to payee underreporting. 2010 tax preparation For debt instruments acquired after 1983: The payee does not certify, under penalties of perjury, that he or she is not subject to backup withholding under (3), or The payee does not certify, under penalties of perjury, that the TIN given is correct. 2010 tax preparation However, for short-term discount obligations (other than government obligations), bearer bonds and coupons, and U. 2010 tax preparation S. 2010 tax preparation savings bonds, backup withholding applies only if the payee does not give you a TIN or gives you an obviously incorrect number for a TIN. 2010 tax preparation Short-term obligations. 2010 tax preparation   Backup withholding applies to OID on a short-term obligation only when the OID is paid at maturity. 2010 tax preparation However, backup withholding applies to any interest payable before maturity when the interest is paid or credited. 2010 tax preparation   If the owner of a short-term obligation at maturity is not the original owner and can establish the purchase price of the obligation, the amount subject to backup withholding must be determined by treating the purchase price as the issue price. 2010 tax preparation However, you can choose to disregard that price if it would require significant manual intervention in the computer or recordkeeping system used for the obligation. 2010 tax preparation If the purchase price of a listed obligation is not established or is disregarded, you must use the issue price shown in Section III. 2010 tax preparation Long-term obligations. 2010 tax preparation   If no cash payments are made on a long-term obligation before maturity, backup withholding applies only at maturity. 2010 tax preparation The amount subject to backup withholding is the OID includible in the owner's gross income for the calendar year when the obligation matures. 2010 tax preparation The amount to be withheld is limited to the cash paid. 2010 tax preparation Registered long-term obligations with cash payments. 2010 tax preparation   If a registered long-term obligation has cash payments before maturity, backup withholding applies when a cash payment is made. 2010 tax preparation The amount subject to backup withholding is the total of the qualified stated interest (defined earlier under Definitions) and OID includible in the owner's gross income for the calendar year when the payment is made. 2010 tax preparation If more than one cash payment is made during the year, the OID subject to withholding for the year must be allocated among the expected cash payments in the ratio that each bears to the total of the expected cash payments. 2010 tax preparation For any payment, the required withholding is limited to the cash paid. 2010 tax preparation Payee not the original owner. 2010 tax preparation   If the payee is not the original owner of the obligation, the OID subject to backup withholding is the OID includible in the gross income of all owners during the calendar year (without regard to any amount paid by the new owner at the time of transfer). 2010 tax preparation The amount subject to backup withholding at maturity of a listed obligation must be determined using the issue price shown in Section I. 2010 tax preparation Bearer long-term obligations with cash payments. 2010 tax preparation   If a bearer long-term obligation has cash payments before maturity, backup withholding applies when the cash payments are made. 2010 tax preparation For payments before maturity, the amount subject to withholding is the qualified stated interest (defined earlier under Definitions) includible in the owner's gross income for the calendar year. 2010 tax preparation For a payment at maturity, the amount subject to withholding is only the total of any qualified stated interest paid at maturity and the OID includible in the owner's gross income for the calendar year when the obligation matures. 2010 tax preparation The required withholding at maturity is limited to the cash paid. 2010 tax preparation Sales and redemptions. 2010 tax preparation   If you report the gross proceeds from a sale, exchange, or redemption of a debt instrument on Form 1099-B for a calendar year, you may be required to withhold 28% of the amount reported. 2010 tax preparation Backup withholding applies in the following situations. 2010 tax preparation The payee does not give you a TIN. 2010 tax preparation The IRS notifies you that the payee gave an incorrect TIN. 2010 tax preparation For debt instruments held in an account opened after 1983, the payee does not certify, under penalties of perjury, that the TIN given is correct. 2010 tax preparation Payments outside the United States to U. 2010 tax preparation S. 2010 tax preparation person. 2010 tax preparation   The requirements for backup withholding and information reporting apply to payments of OID and interest made outside the United States to a U. 2010 tax preparation S. 2010 tax preparation person, a controlled foreign corporation, or a foreign person at least 50% of whose income for the preceding 3-year period is effectively connected with the conduct of a U. 2010 tax preparation S. 2010 tax preparation trade or business. 2010 tax preparation Payments to foreign person. 2010 tax preparation   The following discussions explain the rules for backup withholding and information reporting on payments to foreign persons. 2010 tax preparation U. 2010 tax preparation S. 2010 tax preparation -source amount. 2010 tax preparation   Backup withholding and information reporting are not required for payments of U. 2010 tax preparation S. 2010 tax preparation -source OID, interest, or proceeds from a sale or redemption of an OID instrument if the payee has given you proof (generally the appropriate Form W-8 or an acceptable substitute) that the payee is a foreign person. 2010 tax preparation A U. 2010 tax preparation S. 2010 tax preparation resident is not a foreign person. 2010 tax preparation For proof of the payee's foreign status, you can rely on the appropriate Form W-8 or on documentary evidence for payments made outside the United States to an offshore account or, in case of broker proceeds, a sale effected outside the United States. 2010 tax preparation Receipt of the appropriate Form W-8 does not relieve you from information reporting and backup withholding if you actually know the payee is a U. 2010 tax preparation S. 2010 tax preparation person. 2010 tax preparation   For information about the 28% withholding tax that may apply to payments of U. 2010 tax preparation S. 2010 tax preparation -source OID or interest to foreign persons, see Publication 515. 2010 tax preparation Foreign-source amount. 2010 tax preparation   Backup withholding and information reporting are not required for payments of foreign-source OID and interest made outside the United States. 2010 tax preparation However, if the payments are made inside the United States, the requirements for backup withholding and information reporting will apply unless the payee has given you the appropriate Form W-8 or acceptable substitute as proof that the payee is a foreign person. 2010 tax preparation More information. 2010 tax preparation   For more information about backup withholding and information reporting on foreign-source amounts or payments to foreign persons, see Regulations section 1. 2010 tax preparation 6049-5. 2010 tax preparation Information for Owners of OID Debt Instruments This section is for persons who prepare their own tax returns. 2010 tax preparation It discusses the income tax rules for figuring and reporting OID on long-term debt instruments. 2010 tax preparation It also includes a similar discussion for stripped bonds and coupons, such as zero coupon bonds available through the Department of the Treasury's STRIPS program and government-sponsored enterprises such as the Resolution Funding Corporation. 2010 tax preparation However, the information provided does not cover every situation. 2010 tax preparation More information can be found in the regulations under sections 1271 through 1275 of the Internal Revenue Code. 2010 tax preparation Including OID in income. 2010 tax preparation   Generally, you include OID in income as it accrues each year, whether or not you receive any payments from the debt instrument issuer. 2010 tax preparation Exceptions. 2010 tax preparation   The rules for including OID in income as it accrues generally do not apply to the following debt instruments. 2010 tax preparation U. 2010 tax preparation S. 2010 tax preparation savings bonds. 2010 tax preparation Tax-exempt obligations. 2010 tax preparation (However, see Tax-Exempt Bonds and Coupons, later. 2010 tax preparation ) Obligations issued by individuals before March 2, 1984. 2010 tax preparation Loans of $10,000 or less between individuals who are not in the business of lending money. 2010 tax preparation (The dollar limit includes outstanding prior loans by the lender to the borrower. 2010 tax preparation ) This exception does not apply if a principal purpose of the loan is to avoid any federal tax. 2010 tax preparation   See chapter 1 of Publication 550 for information about the rules for these and other types of discounted debt instruments, such as short-term and market discount obligations. 2010 tax preparation Publication 550 also discusses rules for holders of REMIC interests and CDOs. 2010 tax preparation De minimis rule. 2010 tax preparation   You can treat OID as zero if the total OID on a debt instrument is less than one-fourth of 1% (. 2010 tax preparation 0025) of the stated redemption price at maturity multiplied by the number of full years from the date of original issue to maturity. 2010 tax preparation Debt instruments with de minimis OID are not listed in this publication. 2010 tax preparation There are special rules to determine the de minimis amount in the case of debt instruments that provide for more than one payment of principal. 2010 tax preparation Also, the de minimis rules generally do not apply to tax-exempt obligations. 2010 tax preparation Example 2. 2010 tax preparation You bought at issuance a 10-year debt instrument with a stated redemption price at maturity of $1,000, issued at $980 with OID of $20. 2010 tax preparation One-fourth of 1% of $1,000 (the stated redemption price) times 10 (the number of full years from the date of original issue to maturity) equals $25. 2010 tax preparation Under the de minimis rule, you can treat the OID as zero because the $20 discount is less than $25. 2010 tax preparation Example 3. 2010 tax preparation Assume the same facts as Example 2, except the debt instrument was issued at $950. 2010 tax preparation You must report part of the $50 OID each year because it is more than $25. 2010 tax preparation Choice to report all interest as OID. 2010 tax preparation   Generally, you can choose to treat all interest on a debt instrument acquired after April 3, 1994, as OID and include it in gross income by using the constant yield method. 2010 tax preparation See Constant yield method under Debt Instruments Issued After 1984, later, for more information. 2010 tax preparation   For this choice, interest includes stated interest, acquisition discount, OID, de minimis OID, market discount, de minimis market discount, and unstated interest, as adjusted by any amortizable bond premium or acquisition premium. 2010 tax preparation For more information, see Regulations section 1. 2010 tax preparation 1272-3. 2010 tax preparation Purchase after date of original issue. 2010 tax preparation   A debt instrument you purchased after the date of original issue may have premium, acquisition premium, or market discount. 2010 tax preparation If so, the OID reported to you on Form 1099-OID may have to be adjusted. 2010 tax preparation For more information, see Showing an OID adjustment under How To Report OID, later. 2010 tax preparation The following rules generally do not apply to contingent payment debt instruments. 2010 tax preparation Adjustment for premium. 2010 tax preparation   If your debt instrument (other than an inflation-indexed debt instrument) has premium, do not report any OID as ordinary income. 2010 tax preparation Your adjustment is the total OID shown on your Form 1099-OID. 2010 tax preparation Adjustment for acquisition premium. 2010 tax preparation   If your debt instrument has acquisition premium, reduce the OID you report. 2010 tax preparation Your adjustment is the difference between the OID shown on your Form 1099-OID and the reduced OID amount figured using the rules explained later under Figuring OID on Long-Term Debt Instruments. 2010 tax preparation Adjustment for market discount. 2010 tax preparation   If your debt instrument has market discount that you choose to include in income currently, increase the OID you report. 2010 tax preparation Your adjustment is the accrued market discount for the year. 2010 tax preparation See Market Discount Bonds in chapter 1 of Publication 550 for information on how to figure accrued market discount and include it in your income currently and for other information about market discount bonds. 2010 tax preparation If you choose to use the constant yield method to figure accrued market discount, also see Figuring OID on Long-Term Debt Instruments, later. 2010 tax preparation The constant yield method of figuring accrued OID, explained in those discussions under Constant yield method, is also used to figure accrued market discount. 2010 tax preparation For more information concerning premium or market discount on an inflation-indexed debt instrument, see Regulations section 1. 2010 tax preparation 1275-7. 2010 tax preparation Sale, exchange, or redemption. 2010 tax preparation   Generally, you treat your gain or loss from the sale, exchange, or redemption of a discounted debt instrument as a capital gain or loss if you held the debt instrument as a capital asset. 2010 tax preparation If you sold the debt instrument through a broker, you should receive Form 1099-B or an equivalent statement from the broker. 2010 tax preparation Use the Form 1099-B or other statement and your brokerage statements to complete Form 8949, and Schedule D (Form 1040). 2010 tax preparation   Your gain or loss is the difference between the amount you realized on the sale, exchange, or redemption and your basis in the debt instrument. 2010 tax preparation Your basis, generally, is your cost increased by the OID you have included in income each year you held it. 2010 tax preparation In general, to determine your gain or loss on a tax-exempt bond, figure your basis in the bond by adding to your cost the OID you would have included in income if the bond had been taxable. 2010 tax preparation   See chapter 4 of Publication 550 for more information about the tax treatment of the sale or redemption of discounted debt instruments. 2010 tax preparation Example 4. 2010 tax preparation Larry, a calendar year taxpayer, bought a corporate debt instrument at original issue for $86,235. 2010 tax preparation 00 on November 1 of Year 1. 2010 tax preparation The 15-year debt instrument matures on October 31 of Year 16 at a stated redemption price of $100,000. 2010 tax preparation The debt instrument provides for semiannual payments of interest at 10%. 2010 tax preparation Assume the debt instrument is a capital asset in Larry's hands. 2010 tax preparation The debt instrument has $13,765. 2010 tax preparation 00 of OID ($100,000 stated redemption price at maturity minus $86,235. 2010 tax preparation 00 issue price). 2010 tax preparation Larry sold the debt instrument for $90,000 on November 1 of Year 4. 2010 tax preparation Including the OID he will report for the period he held the debt instrument in Year 4, Larry has included $4,556. 2010 tax preparation 00 of OID in income and has increased his basis by that amount to $90,791. 2010 tax preparation 00. 2010 tax preparation Larry has realized a loss of $791. 2010 tax preparation 00. 2010 tax preparation All of Larry's loss is capital loss. 2010 tax preparation Form 1099-OID The issuer of the debt instrument (or your broker, if you purchased or held the debt instrument through a broker) should give you a copy of Form 1099-OID or a similar statement if the accrued OID for the calendar year is $10 or more and the term of the debt instrument is more than 1 year. 2010 tax preparation Form 1099-OID shows all OID income in box 1 except OID on a U. 2010 tax preparation S. 2010 tax preparation Treasury obligation, which is shown in box 8. 2010 tax preparation It also shows, in box 2, any qualified stated interest you must include in income. 2010 tax preparation (However, any qualified stated interest on Treasury inflation-protected securities can be reported on Form 1099-INT in box 3. 2010 tax preparation ) A copy of Form 1099-OID will be sent to the IRS. 2010 tax preparation Do not attach your copy to your tax return. 2010 tax preparation Keep it for your records. 2010 tax preparation If you are required to file a tax return and you receive Form 1099-OID showing taxable amounts, you must report these amounts on your return. 2010 tax preparation A 20% accuracy-related penalty may be charged for underpayment of tax due to either negligence or disregard of rules and regulations or substantial understatement of tax. 2010 tax preparation Form 1099-OID not received. 2010 tax preparation   If you held an OID debt instrument for a calendar year but did not receive a Form 1099-OID, refer to the discussions under Figuring OID on Long-Term Debt Instruments, later, for information on the OID you must report. 2010 tax preparation Refiguring OID. 2010 tax preparation   You must refigure the OID shown on Form 1099-OID, in box 1 or box 8, to determine the proper amount to include in income if one of the following applies. 2010 tax preparation You bought the debt instrument at a premium or at an acquisition premium. 2010 tax preparation The debt instrument is a stripped bond or coupon (including zero coupon bonds backed by U. 2010 tax preparation S. 2010 tax preparation Treasury securities). 2010 tax preparation The debt instrument is a contingent payment or inflation-indexed debt instrument. 2010 tax preparation See the discussions under Figuring OID on Long-Term Debt Instruments or Figuring OID on Stripped Bonds and Coupons, later, for the specific computations. 2010 tax preparation Refiguring interest. 2010 tax preparation   If you disposed of a debt instrument or acquired it from another holder between interest dates, see the discussion under Bonds Sold Between Interest Dates in chapter 1 of Publication 550 for information about refiguring the interest shown on Form 1099-OID in box 2. 2010 tax preparation Nominee. 2010 tax preparation   If you are the holder of an OID debt instrument and you receive a Form 1099-OID that shows your taxpayer identification number and includes amounts belonging to another person, you are considered a “nominee. 2010 tax preparation ” You must file another Form 1099-OID for each actual owner, showing the OID for the owner. 2010 tax preparation Show the owner of the debt instrument as the “recipient” and you as the “payer. 2010 tax preparation ”   Complete Form 1099-OID and Form 1096 and file the forms with the Internal Revenue Service Center for your area. 2010 tax preparation You must also give a copy of the Form 1099-OID to the actual owner. 2010 tax preparation However, you are not required to file a nominee return to show amounts belonging to your spouse. 2010 tax preparation See the Form 1099 instructions for more information. 2010 tax preparation   When preparing your tax return, follow the instructions under Showing an OID adjustment in the next discussion. 2010 tax preparation How To Report OID Generally, you report your taxable interest and OID income on the interest line of Form 1040EZ, Form 1040A, or Form 1040. 2010 tax preparation Form 1040 or Form 1040A required. 2010 tax preparation   You must use Form 1040 or Form 1040A (you cannot use Form 1040EZ) under either of the following conditions. 2010 tax preparation You received a Form 1099-OID as a nominee for the actual owner. 2010 tax preparation Your total interest and OID income for the year was more than $1,500. 2010 tax preparation Form 1040 required. 2010 tax preparation   You must use Form 1040 (you cannot use Form 1040A or Form 1040EZ) if you are reporting more or less OID than the amount shown on Form 1099-OID, other than because you are a nominee. 2010 tax preparation For example, if you paid a premium or an acquisition premium when you purchased the debt instrument, you must use Form 1040 because you will report less OID than shown on Form 1099-OID. 2010 tax preparation Also, you must use Form 1040 if you were charged an early withdrawal penalty. 2010 tax preparation Where to report. 2010 tax preparation   List each payer's name (if a brokerage firm gave you a Form 1099, list the brokerage firm as the payer) and the amount received from each payer on Form 1040A, Schedule B, Part I, line 1, or Form 1040, Schedule B, line 1. 2010 tax preparation Include all OID and periodic interest shown on any Form 1099-OID, boxes 1, 2, and 8, you received for the tax year. 2010 tax preparation Also include any other OID and interest income for which you did not receive a Form 1099. 2010 tax preparation Showing an OID adjustment. 2010 tax preparation   If you use Form 1040 to report more or less OID than shown on Form 1099-OID, list the full OID on Schedule B, Part I, line 1, and follow the instructions under 1 or 2, next. 2010 tax preparation   If you use Form 1040A to report the OID shown on a Form 1099-OID you received as a nominee for the actual owner, list the full OID on Schedule B, Part I, line 1 and follow the instructions under 1. 2010 tax preparation If the OID, as adjusted, is less than the amount shown on Form 1099-OID, show the adjustment as follows. 2010 tax preparation Under your last entry on line 1, subtotal all interest and OID income listed on line 1. 2010 tax preparation Below the subtotal, write “Nominee Distribution” or “OID Adjustment” and show the OID you are not required to report. 2010 tax preparation Subtract that OID from the subtotal and enter the result on line 2. 2010 tax preparation If the OID, as adjusted, is more than the amount shown on Form 1099-OID, show the adjustment as follows. 2010 tax preparation Under your last entry on line 1, subtotal all interest and OID income listed on line 1. 2010 tax preparation Below the subtotal, write “OID Adjustment” and show the additional OID. 2010 tax preparation Add that OID to the subtotal and enter the result on line 2. 2010 tax preparation Figuring OID on Long-Term Debt Instruments How you figure the OID on a long-term debt instrument depends on the date it was issued. 2010 tax preparation It also may depend on the type of the debt instrument. 2010 tax preparation There are different rules for each of the following debt instruments. 2010 tax preparation Corporate debt instruments issued after 1954 and before May 28, 1969, and government debt instruments issued after 1954 and before July 2, 1982. 2010 tax preparation Corporate debt instruments issued after May 27, 1969, and before July 2, 1982. 2010 tax preparation Debt instruments issued after July 1, 1982, and before 1985. 2010 tax preparation Debt instruments issued after 1984 (other than debt instruments described in (5) and (6)). 2010 tax preparation Contingent payment debt instruments issued after August 12, 1996. 2010 tax preparation Inflation-indexed debt instruments (including Treasury inflation-protected securities) issued after January 5, 1997. 2010 tax preparation Zero coupon bonds. 2010 tax preparation   The rules for figuring OID on zero coupon bonds backed by U. 2010 tax preparation S. 2010 tax preparation Treasury securities are discussed under Figuring OID on Stripped Bonds and Coupons, later. 2010 tax preparation Corporate Debt Instruments Issued After 1954 and Before May 28, 1969, and Government Debt Instruments Issued After 1954 and Before July 2, 1982 If you hold these debt instruments as capital assets, you include OID in income only in the year the debt instrument is sold, exchanged, or redeemed, and only if you have a gain. 2010 tax preparation The OID, which is taxed as ordinary income, generally equals the following amount. 2010 tax preparation   number of full months you held the debt instrument  number of full months from date of original issue to date of maturity X original issue discount The balance of the gain is capital gain. 2010 tax preparation If there is a loss on the sale of the debt instrument, the entire loss is a capital loss and no OID is reported. 2010 tax preparation Corporate Debt Instruments Issued After May 27, 1969, and Before July 2, 1982 If you hold these debt instruments as capital assets, you must include part of the OID in income each year you own the debt instruments. 2010 tax preparation For information about showing the correct OID on your tax return, see the discussion under How To Report OID, earlier. 2010 tax preparation Your basis in the debt instrument is increased by the OID you include in income. 2010 tax preparation Form 1099-OID. 2010 tax preparation   You should receive a Form 1099-OID showing OID for the part of the year you held the debt instrument. 2010 tax preparation However, if you paid an acquisition premium, you may need to refigure the OID to report on your tax return. 2010 tax preparation See Reduction for acquisition premium, later. 2010 tax preparation If you held an OID debt instrument in a calendar year but did not receive a Form 1099-OID, see Form 1099-OID not received, immediately below, and refer to Section I-A available at www. 2010 tax preparation irs. 2010 tax preparation gov/pub1212 by clicking the link under Recent Developments. 2010 tax preparation Form 1099-OID not received. 2010 tax preparation    The OID listed is for each $1,000 of redemption price. 2010 tax preparation You must adjust the listed amount if your debt instrument has a different principal amount. 2010 tax preparation For example, if you have a debt instrument with a $500 principal amount, use one-half the listed amount to figure your OID. 2010 tax preparation   If you held the debt instrument the entire year, use the OID shown in Section I-A for a calendar year. 2010 tax preparation (If your debt instrument is not listed in Section I-A, consult the issuer for information about the issue price and the OID that accrued for that year. 2010 tax preparation ) If you did not hold the debt instrument the entire year, figure your OID using the following method. 2010 tax preparation Divide the OID shown by 12. 2010 tax preparation Multiply the result in (1) by the number of complete and partial months (for example, 6½ months) you held the debt instrument during a calendar year. 2010 tax preparation This is the OID to include in income unless you paid an acquisition premium. 2010 tax preparation The reduction for acquisition premium is discussed next. 2010 tax preparation Reduction for acquisition premium. 2010 tax preparation   If you bought the debt instrument at an acquisition premium, figure the OID to include in income as follows. 2010 tax preparation Divide the total OID on the debt instrument by the number of complete months, and any part of a month, from the date of original issue to the maturity date. 2010 tax preparation This is the monthly OID. 2010 tax preparation Subtract from your cost the issue price and the accumulated OID from the date of issue to the date of purchase. 2010 tax preparation (If the result is zero or less, stop here. 2010 tax preparation You did not pay an acquisition premium. 2010 tax preparation ) Divide the amount figured in (2) by the number of complete months, and any part of a month, from the date of your purchase to the maturity date. 2010 tax preparation Subtract the amount figured in (3) from the amount figured in (1). 2010 tax preparation This is the OID to include in income for each month you hold the debt instrument during the year. 2010 tax preparation Transfers during the month. 2010 tax preparation   If you buy or sell a debt instrument on any day other than the same day of the month as the date of original issue, the ratable monthly portion of OID for the month of sale is divided between the seller and the buyer according to the number of days each held the debt instrument. 2010 tax preparation Your holding period for this purpose begins the day you acquire the debt instrument and ends the day before you dispose of it. 2010 tax preparation Debt Instruments Issued After July 1, 1982, and Before 1985 If you hold these debt instruments as capital assets, you must include part of the OID in income each year you own the debt instruments and increase your basis by the amount included. 2010 tax preparation For information about showing the correct OID on your tax return, see How To Report OID, earlier. 2010 tax preparation Form 1099-OID. 2010 tax preparation   You should receive a Form 1099-OID showing OID for the part of the year you held the debt instrument. 2010 tax preparation However, if you paid an acquisition premium, you may need to refigure the OID to report on your tax return. 2010 tax preparation See Constant yield method and the discussions on acquisition premium that follow, later. 2010 tax preparation If you held an OID debt instrument in a calendar year but did not receive a Form 1099-OID, see Form 1099-OID not received, immediately below, and refer to Section I-A available at www. 2010 tax preparation irs. 2010 tax preparation gov/pub1212 by clicking the link under Recent Developments. 2010 tax preparation Form 1099-OID not received. 2010 tax preparation    The OID listed is for each $1,000 of redemption price. 2010 tax preparation You must adjust the listed amount if your debt instrument has a different principal amount. 2010 tax preparation For example, if you have a debt instrument with a $500 principal amount, use one-half the listed amount to figure your OID. 2010 tax preparation   If you held the debt instrument the entire year, use the OID shown in Section I-A. 2010 tax preparation (If your instrument is not listed in Section I-A, consult the issuer for information about the issue price, the yield to maturity, and the OID that accrued for that year. 2010 tax preparation ) If you did not hold the debt instrument the entire year, figure your OID using either of the following methods. 2010 tax preparation Method 1. 2010 tax preparation    Divide the total OID for a calendar year by 365 (366 for leap years). 2010 tax preparation Multiply the result in (1) by the number of days you held the debt instrument during that particular year. 2010 tax preparation  This computation is an approximation and may result in a slightly higher OID than Method 2. 2010 tax preparation Method 2. 2010 tax preparation    Look up the daily OID for the first accrual period you held the debt instrument during a calendar year. 2010 tax preparation (See Accrual period under Constant yield method, next. 2010 tax preparation ) Multiply the daily OID by the number of days you held the debt instrument during that accrual period. 2010 tax preparation If you held the debt instrument for part of both accrual periods, repeat (1) and (2) for the second accrual period. 2010 tax preparation Add the results of (2) and (3). 2010 tax preparation This is the OID to include in income, unless you paid an acquisition premium. 2010 tax preparation (The reduction for acquisition premium is discussed later. 2010 tax preparation ) Constant yield method. 2010 tax preparation   This discussion shows how to figure OID on debt instruments issued after July 1, 1982, and before 1985, using a constant yield method. 2010 tax preparation OID is allocated over the life of the debt instrument through adjustments to the issue price for each accrual period. 2010 tax preparation   Figure the OID allocable to any accrual period as follows. 2010 tax preparation Multiply the adjusted issue price at the beginning of the accrual period by the debt instrument's yield to maturity. 2010 tax preparation Subtract from the result in (1) any qualified stated interest allocable to the accrual period. 2010 tax preparation Accrual period. 2010 tax preparation   An accrual period for any OID debt instrument issued after July 1, 1982, and before 1985 is each 1-year period beginning on the date of the issue of the obligation and each anniversary thereafter, or the shorter period to maturity for the last accrual period. 2010 tax preparation Your tax year will usually include parts of two accrual periods. 2010 tax preparation Daily OID. 2010 tax preparation   The OID for any accrual period is allocated equally to each day in the accrual period. 2010 tax preparation You must include in income the sum of the OID amounts for each day you hold the debt instrument during the year. 2010 tax preparation If your tax year includes parts of two or more accrual periods, you must include the proper daily OID amounts for each accrual period. 2010 tax preparation Figuring daily OID. 2010 tax preparation   The daily OID for the initial accrual period is figured using the following formula. 2010 tax preparation   (ip × ytm) − qsi     p   ip = issue price ytm = yield to maturity qsi = qualified stated interest p = number of days in accrual period         The daily OID for subsequent accrual periods is figured the same way except the adjusted issue price at the beginning of each period is used in the formula instead of the issue price. 2010 tax preparation Reduction for acquisition premium on debt instruments purchased before July 19, 1984. 2010 tax preparation   If you bought the debt instrument at an acquisition premium before July 19, 1984, figure the OID includible in income by reducing the daily OID by the daily acquisition premium. 2010 tax preparation Figure the daily acquisition premium by dividing the total acquisition premium by the number of days in the period beginning on your purchase date and ending on the day before the date of maturity. 2010 tax preparation Reduction for acquisition premium on debt instruments purchased after July 18, 1984. 2010 tax preparation   If you bought the debt instrument at an acquisition premium after July 18, 1984, figure the OID includible in income by reducing the daily OID by the daily acquisition premium. 2010 tax preparation However, the method of figuring the daily acquisition premium is different from the method described in the preceding discussion. 2010 tax preparation To figure the daily acquisition premium under this method, multiply the daily OID by the following fraction. 2010 tax preparation The numerator is the acquisition premium. 2010 tax preparation The denominator is the total OID remaining for the debt instrument after your purchase date. 2010 tax preparation Section I-A is available at www. 2010 tax preparation irs. 2010 tax preparation gov/pub1212 and clicking the link under Recent Developments. 2010 tax preparation Using Section I-A to figure accumulated OID. 2010 tax preparation   If you bought your corporate debt instrument in a calendar year or the subsequent year, you can figure the accumulated OID to the date of purchase by adding the following amounts. 2010 tax preparation The amount from the “Total OID to January 1, YYYY” column for your debt instrument. 2010 tax preparation The OID from January 1 of a calendar year to the date of purchase, figured as follows. 2010 tax preparation Multiply the daily OID for the first accrual period in the calendar year by the number of days from January 1 to the date of purchase, or the end of the accrual period if the debt instrument was purchased in the second or third accrual period. 2010 tax preparation Multiply the daily OID for each subsequent accrual period by the number of days in the period to the date of purchase or the end of the accrual period, whichever applies. 2010 tax preparation Add the amounts figured in (2a) and (2b). 2010 tax preparation Debt Instruments Issued After 1984 If you hold debt instruments issued after 1984, you must report part of the OID in gross income each year that you own the debt instruments. 2010 tax preparation You must include the OID in gross income whether or not you hold the debt instrument as a capital asset. 2010 tax preparation Your basis in the debt instrument is increased by the OID you include in income. 2010 tax preparation For information about showing the correct OID on your tax return, see How To Report OID, earlier. 2010 tax preparation Form 1099-OID. 2010 tax preparation   You should receive a Form 1099-OID showing OID for the part of a calendar year you held the debt instrument. 2010 tax preparation However, if you paid an acquisition premium, you may need to refigure the OID to report on your tax return. 2010 tax preparation See Constant yield method and Reduction for acquisition premium, later. 2010 tax preparation   You may also need to refigure the OID for a contingent payment or inflation-indexed debt instrument on which the amount reported on Form 1099-OID is inaccurate. 2010 tax preparation See Contingent Payment Debt Instruments or Inflation-Indexed Debt Instruments, later. 2010 tax preparation If you held an OID debt instrument in a calendar year but did not receive a Form 1099-OID, see Form 1099-OID not received, immediately below, and refer to Section I-B available at www. 2010 tax preparation irs. 2010 tax preparation gov/pub1212 by clicking the link under Recent Developments. 2010 tax preparation Form 1099-OID not received. 2010 tax preparation   The OID listed is for each $1,000 of redemption price. 2010 tax preparation You must adjust the listed amount if your debt instrument has a different principal amount. 2010 tax preparation For example, if you have a debt instrument with a $500 principal amount, use one-half the listed amount to figure your OID. 2010 tax preparation   Use the OID shown in Section I-B for a calendar year if you held the debt instrument the entire year. 2010 tax preparation (If your debt instrument is not listed in Section I-B, consult the issuer for information about the issue price, the yield to maturity, and the OID that accrued for that year. 2010 tax preparation ) If you did not hold the debt instrument the entire year, figure your OID as follows. 2010 tax preparation Look up the daily OID for the first accrual period in which you held the debt instrument during a calendar year. 2010 tax preparation (See Accrual period under Constant yield method, later. 2010 tax preparation ) Multiply the daily OID by the number of days you held the debt instrument during that accrual period. 2010 tax preparation Repeat (1) and (2) for any remaining accrual periods in which you held the debt instrument. 2010 tax preparation Add the results of (2) and (3). 2010 tax preparation This is the OID to include in income for that year, unless you paid an acquisition premium. 2010 tax preparation (The reduction for acquisition premium is discussed later. 2010 tax preparation ) Tax-exempt bond. 2010 tax preparation   If you own a tax-exempt bond, figure your basis in the bond by adding to your cost the OID you would have included in income if the bond had been taxable. 2010 tax preparation You need to make this adjustment to determine if you have a gain or loss on a later disposition of the bond. 2010 tax preparation In general, use the rules that follow to determine your OID. 2010 tax preparation Constant yield method. 2010 tax preparation   This discussion shows how to figure OID on debt instruments issued after 1984 using a constant yield method. 2010 tax preparation (The special rules that apply to contingent payment debt instruments and inflation-indexed debt instruments are explained later. 2010 tax preparation ) OID is allocated over the life of the debt instrument through adjustments to the issue price for each accrual period. 2010 tax preparation   Figure the OID allocable to any accrual period as follows. 2010 tax preparation Multiply the adjusted issue price at the beginning of the accrual period by a fraction. 2010 tax preparation The numerator of the fraction is the debt instrument's yield to maturity and the denominator is the number of accrual periods per year. 2010 tax preparation The yield must be stated appropriately taking into account the length of the particular accrual period. 2010 tax preparation Subtract from the result in (1) any qualified stated interest allocable to the accrual period. 2010 tax preparation Accrual period. 2010 tax preparation   For debt instruments issued after 1984 and before April 4, 1994, an accrual period is each 6-month period that ends on the day that corresponds to the stated maturity date of the debt instrument or the date 6 months before that date. 2010 tax preparation For example, a debt instrument maturing on March 31 has accrual periods that end on September 30 and March 31 of each calendar year. 2010 tax preparation Any short period is included as the first accrual period. 2010 tax preparation   For debt instruments issued after April 3, 1994, accrual periods may be of any length and may vary in length over the term of the debt instrument, as long as each accrual period is no longer than 1 year and all payments are made on the first or last day of an accrual period. 2010 tax preparation However, the OID listed for these debt instruments in Section I-B has been figured using 6-month accrual periods. 2010 tax preparation Daily OID. 2010 tax preparation   The OID for any accrual period is allocated equally to each day in the accrual period. 2010 tax preparation Figure the amount to include in income by adding the OID for each day you hold the debt instrument during the year. 2010 tax preparation Since your tax year will usually include parts of two or more accrual periods, you must include the proper daily OID for each accrual period. 2010 tax preparation If your debt instrument has 6-month accrual periods, your tax year will usually include one full 6-month accrual period and parts of two other 6-month periods. 2010 tax preparation Figuring daily OID. 2010 tax preparation   The daily OID for the initial accrual period is figured using the following formula. 2010 tax preparation   (ip × ytm/n) − qsi     p   ip = issue price ytm = yield to maturity n = number of accrual periods in 1 year qsi = qualified stated interest p = number of days in accrual period       The daily OID for subsequent accrual periods is figured the same way except the adjusted issue price at the beginning of each period is used in the formula instead of the issue price. 2010 tax preparation Example 5. 2010 tax preparation On January 1 of Year 1, you bought a 15-year, 10% debt instrument of A Corporation at original issue for $86,235. 2010 tax preparation 17. 2010 tax preparation According to the prospectus, the debt instrument matures on December 31 of Year 15 at a stated redemption price of $100,000. 2010 tax preparation The yield to maturity is 12%, compounded semiannually. 2010 tax preparation The debt instrument provides for qualified stated interest payments of $5,000 on June 30 and December 31 of each calendar year. 2010 tax preparation The accrual periods are the 6-month periods ending on each of these dates. 2010 tax preparation The number of days for the first accrual period (January 1 through June 30) is 181 days (182 for leap years). 2010 tax preparation The daily OID for the first accrual period is figured as follows. 2010 tax preparation   ($86,235. 2010 tax preparation 17 x . 2010 tax preparation 12/2) – $5,000     181 days     = $174. 2010 tax preparation 11020 = $. 2010 tax preparation 96193   181           The adjusted issue price at the beginning of the second accrual period is the issue price plus the OID previously includible in income ($86,235. 2010 tax preparation 17 + $174. 2010 tax preparation 11), or $86,409. 2010 tax preparation 28. 2010 tax preparation The number of days for the second accrual period (July 1 through December 31) is 184 days. 2010 tax preparation The daily OID for the second accrual period is figured as follows. 2010 tax preparation   ($86,409. 2010 tax preparation 28 x . 2010 tax preparation 12/2) – $5,000     184 days     = $184. 2010 tax preparation 55681 = $1. 2010 tax preparation 00303   184 Since the first and second accrual periods coincide exactly with your tax year, you include in income for Year 1 the OID allocable to the first two accrual periods, $174. 2010 tax preparation 11 ($. 2010 tax preparation 95665 × 182 days) plus $184. 2010 tax preparation 56 ($1. 2010 tax preparation 00303 × 184 days), or $358. 2010 tax preparation 67. 2010 tax preparation Add the OID to the $10,000 interest you report on your income tax return for Year 1. 2010 tax preparation Example 6. 2010 tax preparation Assume the same facts as in Example 5, except that you bought the debt instrument at original issue on May 1 of Year 1, with a maturity date of April 30, Year 16. 2010 tax preparation Also, the interest payment dates are October 31 and April 30 of each calendar year. 2010 tax preparation The accrual periods are the 6-month periods ending on each of these dates. 2010 tax preparation The number of days for the first accrual period (May 1 through October 31) is 184 days. 2010 tax preparation The daily OID for the first accrual period is figured as follows. 2010 tax preparation   ($86,235. 2010 tax preparation 17 x . 2010 tax preparation 12/2) – $5,000     184 days     = $174. 2010 tax preparation 11020 = $. 2010 tax preparation 94625   184           The number of days for the second accrual period (November 1 through April 30) is 181 days (182 for leap years). 2010 tax preparation The daily OID for the second accrual period is figured as follows. 2010 tax preparation   ($86,409. 2010 tax preparation 28 x . 2010 tax preparation 12/2) – $5,000     181 days     = $184. 2010 tax preparation 55681 = $1. 2010 tax preparation 01965   181 If you hold the debt instrument through the end of Year 1, you must include $236. 2010 tax preparation 31 of OID in income. 2010 tax preparation This is $174. 2010 tax preparation 11 ($. 2010 tax preparation 94625 × 184 days) for the period May 1 through October 31 plus $62. 2010 tax preparation 20 ($1. 2010 tax preparation 01965 × 61 days) for the period November 1 through December 31. 2010 tax preparation The OID is added to the $5,000 interest income paid on October 31 of Year 1. 2010 tax preparation Your basis in the debt instrument is increased by the OID you include in income. 2010 tax preparation On January 1 of Year 2, your basis in the A Corporation debt instrument is $86,471. 2010 tax preparation 48 ($86,235. 2010 tax preparation 17 + $236. 2010 tax preparation 31). 2010 tax preparation Short first accrual period. 2010 tax preparation   You may have to make adjustments if a debt instrument has a short first accrual period. 2010 tax preparation For example, a debt instrument with 6-month accrual periods that is issued on February 15 and matures on October 31 has a short first accrual period that ends April 30. 2010 tax preparation (The remaining accrual periods begin on May 1 and November 1. 2010 tax preparation ) For this short period, figure the daily OID as described earlier, but adjust the yield for the length of the short accrual period. 2010 tax preparation You may use any reasonable compounding method in determining OID for a short period. 2010 tax preparation Examples of reasonable compounding methods include continuous compounding and monthly compounding (that is, simple interest within a month). 2010 tax preparation Consult your tax advisor for more information about making this computation. 2010 tax preparation   The OID for the final accrual period is the difference between the amount payable at maturity (other than a payment of qualified stated interest) and the adjusted issue price at the beginning of the final accrual period. 2010 tax preparation Reduction for acquisition premium. 2010 tax preparation   If you bought the debt instrument at an acquisition premium, figure the OID includible in income by reducing the daily OID by the daily acquisition premium. 2010 tax preparation To figure the daily acquisition premium, multiply the daily OID by the following fraction. 2010 tax preparation The numerator is the acquisition premium. 2010 tax preparation The denominator is the total OID remaining for the debt instrument after your purchase date. 2010 tax preparation Example 7. 2010 tax preparation Assume the same facts as in Example 6, except that you bought the debt instrument on November 1 of Year 1 for $87,000, after its original issue on May 1 of Year 1. 2010 tax preparation The adjusted issue price on November 1 of Year 1 is $86,409. 2010 tax preparation 28 ($86,235. 2010 tax preparation 17 + $174. 2010 tax preparation 11). 2010 tax preparation In this case, you paid an acquisition premium of $590. 2010 tax preparation 72 ($87,000 − $86,409. 2010 tax preparation 28). 2010 tax preparation The daily OID for the accrual period November 1 through April 30, reduced for the acquisition premium, is figured as follows. 2010 tax preparation 1) Daily OID on date of purchase (2nd accrual period) $1. 2010 tax preparation 01965*  2)  Acquisition premium $590. 2010 tax preparation 72    3)  Total OID remaining after purchase date ($13,764. 2010 tax preparation 83 − $174. 2010 tax preparation 11) 13,590. 2010 tax preparation 72   4) Line 2 ÷ line 3 . 2010 tax preparation 04346  5)  Line 1 × line 4 . 2010 tax preparation 04432  6)  Daily OID reduced for the acquisition premium. 2010 tax preparation Line 1 − line 5 $0. 2010 tax preparation 97533  * As shown in Example 6. 2010 tax preparation The total OID to include in income for Year 1 is $59. 2010 tax preparation 50 ($. 2010 tax preparation 97533 × 61 days). 2010 tax preparation Contingent Payment Debt Instruments This discussion shows how to figure OID on a contingent payment debt instrument issued after August 12, 1996, that was issued for cash or publicly traded property. 2010 tax preparation In general, a contingent payment debt instrument provides for one or more payments that are contingent as to timing or amount. 2010 tax preparation If you hold a contingent payment bond, you must report OID as it accrues each year. 2010 tax preparation Because the actual payments on a contingent payment debt instrument cannot be known in advance, issuers and holders cannot use the constant yield method (discussed earlier under Debt Instruments Issued After 1984) without making certain assumptions about the payments on the debt instrument. 2010 tax preparation To figure OID accruals on contingent payment debt instruments, holders and issuers must use the noncontingent bond method. 2010 tax preparation Noncontingent bond method. 2010 tax preparation    Under this method, the issuer must compute a comparable yield for the debt instrument and, based on this yield, construct a projected payment schedule for the instrument, which includes a projected fixed amount for each contingent payment. 2010 tax preparation In general, holders and issuers accrue OID on this projected payment schedule using the constant yield method that applies to fixed payment debt instruments. 2010 tax preparation When a contingent payment differs from the projected fixed amount, the holders and issuers make adjustments to their OID accruals. 2010 tax preparation If the actual contingent payment is larger than expected, both the issuer and the holder increase their OID accruals. 2010 tax preparation If the actual contingent payment is smaller than expected, holders and issuers generally decrease their OID accruals. 2010 tax preparation Form 1099-OID. 2010 tax preparation   The amount shown on Form 1099-OID in box 1 you receive for a contingent payment debt instrument may not be the correct amount to include in income. 2010 tax preparation For example, the amount may not be correct if the contingent payment was different from the projected amount. 2010 tax preparation If the amount in box 1 is not correct, you must figure the OID to report on your return under the following rules. 2010 tax preparation For information on showing an OID adjustment on your tax return, see How To Report OID, earlier. 2010 tax preparation Figuring OID. 2010 tax preparation   To figure OID on a contingent payment debt instrument, you need to know the “comparable yield” and “projected payment schedule” of the debt instrument. 2010 tax preparation The issuer must make these available to you. 2010 tax preparation Comparable yield. 2010 tax preparation   The comparable yield generally is the yield at which the issuer would issue a fixed rate debt instrument with terms and conditions similar to those of the contingent payment debt instrument. 2010 tax preparation The comparable yield is determined as of the debt instrument's issue date. 2010 tax preparation Projected payment schedule. 2010 tax preparation   The projected payment schedule for a contingent payment debt instrument includes all fixed payments due under the instrument and a projected fixed amount for each contingent payment. 2010 tax preparation The projected payment schedule is created by the issuer as of the debt instrument's issue date. 2010 tax preparation It is used to determine the issuer's and holder's interest accruals and adjustments. 2010 tax preparation Steps for figuring OID. 2010 tax preparation   Figure the OID on a contingent payment debt instrument in two steps. 2010 tax preparation Figure the OID using the constant yield method (discussed earlier under Debt Instruments Issued After 1984 ) that applies to fixed payment debt instruments. 2010 tax preparation Use the comparable yield as the yield to maturity. 2010 tax preparation In general, use the projected payment schedule to determine the instrument's adjusted issue price at the beginning of each accrual period (other than the initial period). 2010 tax preparation Do not treat any amount payable as qualified stated interest. 2010 tax preparation Adjust the OID in (1) to account for actual contingent payments. 2010 tax preparation If the contingent payment is greater than the projected fixed amount, you have a positive adjustment. 2010 tax preparation If the contingent payment is less than the projected fixed amount, you have a negative adjustment. 2010 tax preparation Net positive adjustment. 2010 tax preparation   A net positive adjustment exists for a tax year when the total of any positive adjustments described in (2) above for the tax year is more than the total of any negative adjustments for the tax year. 2010 tax preparation Treat a net positive adjustment as additional OID for the tax year. 2010 tax preparation Net negative adjustment. 2010 tax preparation   A net negative adjustment exists for a tax year when the total of any negative adjustments described in (2) above for the tax year is more than the total of any positive adjustments for the tax year. 2010 tax preparation Use a net negative adjustment to offset OID on the debt instrument for the tax year. 2010 tax preparation If the net negative adjustment is more than the OID on the debt instrument for the tax year, you can claim the difference as an ordinary loss. 2010 tax preparation However, the amount you can claim as an ordinary loss is limited to the OID on the debt instrument you included in income in prior tax years. 2010 tax preparation You must carry forward any net negative adjustment that is more than the total OID for the tax year and prior tax years and treat it as a negative adjustment in the next tax year. 2010 tax preparation Basis adjustments. 2010 tax preparation   In general, increase your basis in a contingent payment debt instrument by the OID included in income. 2010 tax preparation Your basis, however, is not affected by any negative or positive adjustments. 2010 tax preparation Decrease your basis by any noncontingent payment received and the projected contingent payment scheduled to be received. 2010 tax preparation Treatment of gain or loss on sale or exchange. 2010 tax preparation   If you sell a contingent payment debt instrument at a gain, your gain is ordinary income (interest income), even if you hold the debt instrument as a capital asset. 2010 tax preparation If you sell a contingent payment debt instrument at a loss, your loss is an ordinary loss to the extent of your prior OID accruals on the debt instrument. 2010 tax preparation If the debt instrument is a capital asset, treat any loss that is more than your prior OID accruals as a capital loss. 2010 tax preparation See Regulations section 1. 2010 tax preparation 1275-4 for exceptions to these rules. 2010 tax preparation Premium, acquisition premium, and market discount. 2010 tax preparation   The rules for accruing premium, acquisition premium, and market discount do not apply to a contingent payment debt instrument. 2010 tax preparation See Regulations section 1. 2010 tax preparation 1275-4 to determine how to account for these items. 2010 tax preparation Inflation-Indexed Debt Instruments This discussion shows how you figure OID on certain inflation-indexed debt instruments issued after January 5, 1997. 2010 tax preparation An inflation-indexed debt instrument is generally a debt instrument on which the payments are adjusted for inflation and d