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Forms To File 2012 Taxes

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Forms To File 2012 Taxes

Forms to file 2012 taxes 12. Forms to file 2012 taxes   Business Deduction for Work-Related Education Table of Contents What's New Introduction Qualifying Work-Related EducationEducation Required by Employer or by Law Education To Maintain or Improve Skills Education To Meet Minimum Requirements Education That Qualifies You for a New Trade or Business What Expenses Can Be DeductedUnclaimed reimbursement. Forms to file 2012 taxes Transportation Expenses Travel Expenses No Double Benefit Allowed How To Treat ReimbursementsAccountable Plans Nonaccountable Plans Deducting Business ExpensesSelf-Employed Persons Employees Performing Artists and Fee-Basis Officials Impairment-Related Work Expenses Recordkeeping Illustrated Example What's New Standard mileage rate. Forms to file 2012 taxes  Generally, if you claim a business deduction for work-related education and you drive your car to and from school, the amount you can deduct for miles driven from January 1, 2013 through December 31, 2013, is 56. Forms to file 2012 taxes 5 cents per mile. Forms to file 2012 taxes For more information, see Transportation Expenses under What Expenses Can Be Deducted, later. Forms to file 2012 taxes Introduction This chapter discusses work-related education expenses that you may be able to deduct as business expenses. Forms to file 2012 taxes To claim such a deduction, you must: Itemize your deductions on Schedule A (Form 1040 or 1040NR) if you are an employee, File Schedule C (Form 1040), Profit or Loss From Business, Schedule C-EZ (Form 1040), Net Profit From Business, or Schedule F (Form 1040), Profit or Loss From Farming if you are self-employed, and Have expenses for education that meet the requirements discussed under Qualifying Work-Related Education , later. Forms to file 2012 taxes What is the tax benefit of taking a business deduction for work-related education. Forms to file 2012 taxes   If you are an employee and can itemize your deductions, you may be able to claim a deduction for the expenses you pay for your work-related education. Forms to file 2012 taxes Your deduction will be the amount by which your qualifying work-related education expenses plus other job and certain miscellaneous expenses (except for impairment-related work expenses of disabled individuals) is greater than 2% of your adjusted gross income. Forms to file 2012 taxes An itemized deduction reduces the amount of your income subject to tax. Forms to file 2012 taxes   If you are self-employed, you deduct your expenses for qualifying work-related education directly from your self-employment income. Forms to file 2012 taxes This reduces the amount of your income subject to both income tax and self-employment tax. Forms to file 2012 taxes   Your work-related education expenses may also qualify you for other tax benefits, such as the American opportunity and lifetime learning credits. Forms to file 2012 taxes You may qualify for these other benefits even if you do not meet the requirements listed above. Forms to file 2012 taxes   Also, your work-related education expenses may qualify you to claim more than one tax benefit. Forms to file 2012 taxes Generally, you may claim any number of benefits as long as you use different expenses to figure each one. Forms to file 2012 taxes Qualifying Work-Related Education You can deduct the costs of qualifying work-related education as business expenses. Forms to file 2012 taxes This is education that meets at least one of the following two tests. Forms to file 2012 taxes The education is required by your employer or the law to keep your present salary, status, or job. Forms to file 2012 taxes The required education must serve a bona fide business purpose of your employer. Forms to file 2012 taxes The education maintains or improves skills needed in your present work. Forms to file 2012 taxes However, even if the education meets one or both of the above tests, it is not qualifying work-related education if it: Is needed to meet the minimum educational requirements of your present trade or business, or Is part of a program of study that will qualify you for a new trade or business. Forms to file 2012 taxes You can deduct the costs of qualifying work-related education as a business expense even if the education could lead to a degree. Forms to file 2012 taxes Use Figure 12-1, Does Your Work-Related Education Qualify as a quick check to see if your education qualifies. Forms to file 2012 taxes Education Required by Employer or by Law Once you have met the minimum educational requirements for your job, your employer or the law may require you to get more education. Forms to file 2012 taxes This additional education is qualifying work-related education if all three of the following requirements are met. Forms to file 2012 taxes It is required for you to keep your present salary, status, or job, The requirement serves a bona fide business purpose of your employer, and The education is not part of a program that will qualify you for a new trade or business. Forms to file 2012 taxes When you get more education than your employer or the law requires, the additional education can be qualifying work-related education only if it maintains or improves skills required in your present work. Forms to file 2012 taxes See Education To Maintain or Improve Skills , later. Forms to file 2012 taxes Example. Forms to file 2012 taxes You are a teacher who has satisfied the minimum requirements for teaching. Forms to file 2012 taxes Your employer requires you to take an additional college course each year to keep your teaching job. Forms to file 2012 taxes If the courses will not qualify you for a new trade or business, they are qualifying work-related education even if you eventually receive a master's degree and an increase in salary because of this extra education. Forms to file 2012 taxes This image is too large to be displayed in the current screen. Forms to file 2012 taxes Please click the link to view the image. Forms to file 2012 taxes Figure 12-1 Education To Maintain or Improve Skills If your education is not required by your employer or the law, it can be qualifying work-related education only if it maintains or improves skills needed in your present work. Forms to file 2012 taxes This could include refresher courses, courses on current developments, and academic or vocational courses. Forms to file 2012 taxes Example. Forms to file 2012 taxes You repair televisions, radios, and stereo systems for XYZ Store. Forms to file 2012 taxes To keep up with the latest changes, you take special courses in radio and stereo service. Forms to file 2012 taxes These courses maintain and improve skills required in your work. Forms to file 2012 taxes Maintaining skills vs. Forms to file 2012 taxes qualifying for new job. Forms to file 2012 taxes   Education to maintain or improve skills needed in your present work is not qualifying education if it will also qualify you for a new trade or business. Forms to file 2012 taxes Education during temporary absence. Forms to file 2012 taxes   If you stop working for a year or less in order to get education to maintain or improve skills needed in your present work and then return to the same general type of work, your absence is considered temporary. Forms to file 2012 taxes Education that you get during a temporary absence is qualifying work-related education if it maintains or improves skills needed in your present work. Forms to file 2012 taxes Example. Forms to file 2012 taxes You quit your biology research job to become a full-time biology graduate student for 1 year. Forms to file 2012 taxes If you return to work in biology research after completing the courses, the education is related to your present work even if you do not go back to work with the same employer. Forms to file 2012 taxes Education during indefinite absence. Forms to file 2012 taxes   If you stop work for more than a year, your absence from your job is considered indefinite. Forms to file 2012 taxes Education during an indefinite absence, even if it maintains or improves skills needed in the work from which you are absent, is considered to qualify you for a new trade or business. Forms to file 2012 taxes Therefore, it is not qualifying work-related education. Forms to file 2012 taxes Education To Meet Minimum Requirements Education you need to meet the minimum educational requirements for your present trade or business is not qualifying work-related education. Forms to file 2012 taxes The minimum educational requirements are determined by: Laws and regulations, Standards of your profession, trade, or business, and Your employer. Forms to file 2012 taxes Once you have met the minimum educational requirements that were in effect when you were hired, you do not have to meet any new minimum educational requirements. Forms to file 2012 taxes This means that if the minimum requirements change after you were hired, any education you need to meet the new requirements can be qualifying education. Forms to file 2012 taxes You have not necessarily met the minimum educational requirements of your trade or business simply because you are already doing the work. Forms to file 2012 taxes Example 1. Forms to file 2012 taxes You are a full-time engineering student. Forms to file 2012 taxes Although you have not received your degree or certification, you work part time as an engineer for a firm that will employ you as a full-time engineer after you finish college. Forms to file 2012 taxes Although your college engineering courses improve your skills in your present job, they are also needed to meet the minimum job requirements for a full-time engineer. Forms to file 2012 taxes The education is not qualifying work-related education. Forms to file 2012 taxes Example 2. Forms to file 2012 taxes You are an accountant and you have met the minimum educational requirements of your employer. Forms to file 2012 taxes Your employer later changes the minimum educational requirements and requires you to take college courses to keep your job. Forms to file 2012 taxes These additional courses can be qualifying work-related education because you have already satisfied the minimum requirements that were in effect when you were hired. Forms to file 2012 taxes Requirements for Teachers States or school districts usually set the minimum educational requirements for teachers. Forms to file 2012 taxes The requirement is the college degree or the minimum number of college hours usually required of a person hired for that position. Forms to file 2012 taxes If there are no requirements, you will have met the minimum educational requirements when you become a faculty member. Forms to file 2012 taxes The determination of whether you are a faculty member of an educational institution must be made on the basis of the particular practices of the institution. Forms to file 2012 taxes You generally will be considered a faculty member when one or more of the following occurs. Forms to file 2012 taxes You have tenure. Forms to file 2012 taxes Your years of service count toward obtaining tenure. Forms to file 2012 taxes You have a vote in faculty decisions. Forms to file 2012 taxes Your school makes contributions for you to a retirement plan other than social security or a similar program. Forms to file 2012 taxes Example 1. Forms to file 2012 taxes The law in your state requires beginning secondary school teachers to have a bachelor's degree, including 10 professional education courses. Forms to file 2012 taxes In addition, to keep the job a teacher must complete a fifth year of training within 10 years from the date of hire. Forms to file 2012 taxes If the employing school certifies to the state Department of Education that qualified teachers cannot be found, the school can hire persons with only 3 years of college. Forms to file 2012 taxes However, to keep their jobs, these teachers must get a bachelor's degree and the required professional education courses within 3 years. Forms to file 2012 taxes Under these facts, the bachelor's degree, whether or not it includes the 10 professional education courses, is considered the minimum educational requirement for qualification as a teacher in your state. Forms to file 2012 taxes If you have all the required education except the fifth year, you have met the minimum educational requirements. Forms to file 2012 taxes The fifth year of training is qualifying work-related education unless it is part of a program of study that will qualify you for a new trade or business. Forms to file 2012 taxes Example 2. Forms to file 2012 taxes Assume the same facts as in Example 1 except that you have a bachelor's degree and only six professional education courses. Forms to file 2012 taxes The additional four education courses can be qualifying work-related education. Forms to file 2012 taxes Although you do not have all the required courses, you have already met the minimum educational requirements. Forms to file 2012 taxes Example 3. Forms to file 2012 taxes Assume the same facts as in Example 1 except that you are hired with only 3 years of college. Forms to file 2012 taxes The courses you take that lead to a bachelor's degree (including those in education) are not qualifying work-related education. Forms to file 2012 taxes They are needed to meet the minimum educational requirements for employment as a teacher. Forms to file 2012 taxes Example 4. Forms to file 2012 taxes You have a bachelor's degree and you work as a temporary instructor at a university. Forms to file 2012 taxes At the same time, you take graduate courses toward an advanced degree. Forms to file 2012 taxes The rules of the university state that you can become a faculty member only if you get a graduate degree. Forms to file 2012 taxes Also, you can keep your job as an instructor only as long as you show satisfactory progress toward getting this degree. Forms to file 2012 taxes You have not met the minimum educational requirements to qualify you as a faculty member. Forms to file 2012 taxes The graduate courses are not qualifying work-related education. Forms to file 2012 taxes Certification in a new state. Forms to file 2012 taxes   Once you have met the minimum educational requirements for teachers for your state, you are considered to have met the minimum educational requirements in all states. Forms to file 2012 taxes This is true even if you must get additional education to be certified in another state. Forms to file 2012 taxes Any additional education you need is qualifying work-related education. Forms to file 2012 taxes You have already met the minimum requirements for teaching. Forms to file 2012 taxes Teaching in another state is not a new trade or business. Forms to file 2012 taxes Example. Forms to file 2012 taxes You hold a permanent teaching certificate in State A and are employed as a teacher in that state for several years. Forms to file 2012 taxes You move to State B and are promptly hired as a teacher. Forms to file 2012 taxes You are required, however, to complete certain prescribed courses to get a permanent teaching certificate in State B. Forms to file 2012 taxes These additional courses are qualifying work-related education because the teaching position in State B involves the same general kind of work for which you were qualified in State A. Forms to file 2012 taxes Education That Qualifies You for a New Trade or Business Education that is part of a program of study that will qualify you for a new trade or business is not qualifying work-related education. Forms to file 2012 taxes This is true even if you do not plan to enter that trade or business. Forms to file 2012 taxes If you are an employee, a change of duties that involves the same general kind of work is not a new trade or business. Forms to file 2012 taxes Example 1. Forms to file 2012 taxes You are an accountant. Forms to file 2012 taxes Your employer requires you to get a law degree at your own expense. Forms to file 2012 taxes You register at a law school for the regular curriculum that leads to a law degree. Forms to file 2012 taxes Even if you do not intend to become a lawyer, the education is not qualifying because the law degree will qualify you for a new trade or business. Forms to file 2012 taxes Example 2. Forms to file 2012 taxes You are a general practitioner of medicine. Forms to file 2012 taxes You take a 2-week course to review developments in several specialized fields of medicine. Forms to file 2012 taxes The course does not qualify you for a new profession. Forms to file 2012 taxes It is qualifying work- related education because it maintains or improves skills required in your present profession. Forms to file 2012 taxes Example 3. Forms to file 2012 taxes While working in the private practice of psychiatry, you enter a program to study and train at an accredited psychoanalytic institute. Forms to file 2012 taxes The program will lead to qualifying you to practice psychoanalysis. Forms to file 2012 taxes The psychoanalytic training does not qualify you for a new profession. Forms to file 2012 taxes It is qualifying work-related education because it maintains or improves skills required in your present profession. Forms to file 2012 taxes Bar or CPA Review Course Review courses to prepare for the bar examination or the certified public accountant (CPA) examination are not qualifying work-related education. Forms to file 2012 taxes They are part of a program of study that can qualify you for a new profession. Forms to file 2012 taxes Teaching and Related Duties All teaching and related duties are considered the same general kind of work. Forms to file 2012 taxes A change in duties in any of the following ways is not considered a change to a new business. Forms to file 2012 taxes Elementary school teacher to secondary school teacher. Forms to file 2012 taxes Teacher of one subject, such as biology, to teacher of another subject, such as art. Forms to file 2012 taxes Classroom teacher to guidance counselor. Forms to file 2012 taxes Classroom teacher to school administrator. Forms to file 2012 taxes What Expenses Can Be Deducted If your education meets the requirements described earlier under Qualifying Work-Related Education you can generally deduct your education expenses as business expenses. Forms to file 2012 taxes If you are not self-employed, you can deduct business expenses only if you itemize your deductions. Forms to file 2012 taxes You cannot deduct expenses related to tax-exempt and excluded income. Forms to file 2012 taxes Deductible expenses. Forms to file 2012 taxes   The following education expenses can be deducted. Forms to file 2012 taxes Tuition, books, supplies, lab fees, and similar items. Forms to file 2012 taxes Certain transportation and travel costs. Forms to file 2012 taxes Other education expenses, such as costs of research and typing when writing a paper as part of an educational program. Forms to file 2012 taxes Nondeductible expenses. Forms to file 2012 taxes   You cannot deduct personal or capital expenses. Forms to file 2012 taxes For example, you cannot deduct the dollar value of vacation time or annual leave you take to attend classes. Forms to file 2012 taxes This amount is a personal expense. Forms to file 2012 taxes Unclaimed reimbursement. Forms to file 2012 taxes   If you do not claim reimbursement that you are entitled to receive from your employer, you cannot deduct the expenses that apply to that unclaimed reimbursement. Forms to file 2012 taxes Example. Forms to file 2012 taxes Your employer agrees to pay your education expenses if you file a voucher showing your expenses. Forms to file 2012 taxes You do not file a voucher and you do not get reimbursed. Forms to file 2012 taxes Because you did not file a voucher, you cannot deduct the expenses on your tax return. Forms to file 2012 taxes Transportation Expenses If your education qualifies, you can deduct local transportation costs of going directly from work to school. Forms to file 2012 taxes If you are regularly employed and go to school on a temporary basis, you can also deduct the costs of returning from school to home. Forms to file 2012 taxes Temporary basis. Forms to file 2012 taxes   You go to school on a temporary basis if either of the following situations applies to you. Forms to file 2012 taxes Your attendance at school is realistically expected to last 1 year or less and does indeed last for 1 year or less. Forms to file 2012 taxes Initially, your attendance at school is realistically expected to last 1 year or less, but at a later date your attendance is reasonably expected to last more than 1 year. Forms to file 2012 taxes Your attendance is temporary up to the date you determine it will last more than 1 year. Forms to file 2012 taxes If you are in either situation (1) or (2) above, your attendance is not temporary if facts and circumstances indicate otherwise. Forms to file 2012 taxes Attendance not on a temporary basis. Forms to file 2012 taxes   You do not go to school on a temporary basis if either of the following situations apply to you. Forms to file 2012 taxes Your attendance at school is realistically expected to last more than 1 year. Forms to file 2012 taxes It does not matter how long you actually attend. Forms to file 2012 taxes Initially, your attendance at school is realistically expected to last 1 year or less, but at a later date your attendance is reasonably expected to last more than 1 year. Forms to file 2012 taxes Your attendance is not temporary after the date you determine it will last more than 1 year. Forms to file 2012 taxes Deductible Transportation Expenses If you are regularly employed and go directly from home to school on a temporary basis, you can deduct the round-trip costs of transportation between your home and school. Forms to file 2012 taxes This is true regardless of the location of the school, the distance traveled, or whether you attend school on nonwork days. Forms to file 2012 taxes Transportation expenses include the actual costs of bus, subway, cab, or other fares, as well as the costs of using your car. Forms to file 2012 taxes Transportation expenses do not include amounts spent for travel, meals, or lodging while you are away from home overnight. Forms to file 2012 taxes Example 1. Forms to file 2012 taxes You regularly work in a nearby town, and go directly from work to home. Forms to file 2012 taxes You also attend school every work night for 3 months to take a course that improves your job skills. Forms to file 2012 taxes Since you are attending school on a temporary basis, you can deduct your daily round-trip transportation expenses in going between home and school. Forms to file 2012 taxes This is true regardless of the distance traveled. Forms to file 2012 taxes Example 2. Forms to file 2012 taxes Assume the same facts as in Example 1 except that on certain nights you go directly from work to school and then home. Forms to file 2012 taxes You can deduct your transportation expenses from your regular work site to school and then home. Forms to file 2012 taxes Example 3. Forms to file 2012 taxes Assume the same facts as in Example 1 except that you attend the school for 9 months on Saturdays, nonwork days. Forms to file 2012 taxes Since you are attending school on a temporary basis, you can deduct your round-trip transportation expenses in going between home and school. Forms to file 2012 taxes Example 4. Forms to file 2012 taxes Assume the same facts as in Example 1 except that you attend classes twice a week for 15 months. Forms to file 2012 taxes Since your attendance in school is not considered temporary, you cannot deduct your transportation expenses in going between home and school. Forms to file 2012 taxes If you go directly from work to school, you can deduct the one-way transportation expenses of going from work to school. Forms to file 2012 taxes If you go from work to home to school and return home, your transportation expenses cannot be more than if you had gone directly from work to school. Forms to file 2012 taxes Using your car. Forms to file 2012 taxes    If you use your car (whether you own or lease it) for transportation to school, you can deduct your actual expenses or use the standard mileage rate to figure the amount you can deduct. Forms to file 2012 taxes The standard mileage rate for miles driven from January 1, 2013 through December 31, 2013, is 56. Forms to file 2012 taxes 5 cents per mile. Forms to file 2012 taxes Whichever method you use, you can also deduct parking fees and tolls. Forms to file 2012 taxes See Publication 463, chapter 4, for information on deducting your actual expenses of using a car. Forms to file 2012 taxes Travel Expenses You can deduct expenses for travel, meals (see 50% limit on meals , later), and lodging if you travel overnight mainly to obtain qualifying work-related education. Forms to file 2012 taxes Travel expenses for qualifying work-related education are treated the same as travel expenses for other employee business purposes. Forms to file 2012 taxes For more information, see chapter 1 of Publication 463. Forms to file 2012 taxes You cannot deduct expenses for personal activities such as sightseeing, visiting, or entertaining. Forms to file 2012 taxes Mainly personal travel. Forms to file 2012 taxes   If your travel away from home is mainly personal, you cannot deduct all of your expenses for travel, meals, and lodging. Forms to file 2012 taxes You can deduct only your expenses for lodging and 50% of your expenses for meals during the time you attend the qualified educational activities. Forms to file 2012 taxes   Whether a trip's purpose is mainly personal or educational depends upon the facts and circumstances. Forms to file 2012 taxes An important factor is the comparison of time spent on personal activities with time spent on educational activities. Forms to file 2012 taxes If you spend more time on personal activities, the trip is considered mainly educational only if you can show a substantial nonpersonal reason for traveling to a particular location. Forms to file 2012 taxes Example 1. Forms to file 2012 taxes John works in Newark, New Jersey. Forms to file 2012 taxes He traveled to Chicago to take a deductible 1-week course at the request of his employer. Forms to file 2012 taxes His main reason for going to Chicago was to take the course. Forms to file 2012 taxes While there, he took a sightseeing trip, entertained some friends, and took a side trip to Pleasantville for a day. Forms to file 2012 taxes Since the trip was mainly for business, John can deduct his round-trip airfare to Chicago. Forms to file 2012 taxes He cannot deduct his transportation expenses of going to Pleasantville. Forms to file 2012 taxes He can deduct only the meals (subject to the 50% limit) and lodging connected with his educational activities. Forms to file 2012 taxes Example 2. Forms to file 2012 taxes Sue works in Boston. Forms to file 2012 taxes She went to a university in Michigan to take a course for work. Forms to file 2012 taxes The course is qualifying work-related education. Forms to file 2012 taxes She took one course, which is one-fourth of a full course load of study. Forms to file 2012 taxes She spent the rest of the time on personal activities. Forms to file 2012 taxes Her reasons for taking the course in Michigan were all personal. Forms to file 2012 taxes Sue's trip is mainly personal because three-fourths of her time is considered personal time. Forms to file 2012 taxes She cannot deduct the cost of her round-trip train ticket to Michigan. Forms to file 2012 taxes She can deduct one-fourth of the meals (subject to the 50% limit) and lodging costs for the time she attended the university. Forms to file 2012 taxes Example 3. Forms to file 2012 taxes Dave works in Nashville and recently traveled to California to take a 2-week seminar. Forms to file 2012 taxes The seminar is qualifying work-related education. Forms to file 2012 taxes While there, he spent an extra 8 weeks on personal activities. Forms to file 2012 taxes The facts, including the extra 8-week stay, show that his main purpose was to take a vacation. Forms to file 2012 taxes Dave cannot deduct his round-trip airfare or his meals and lodging for the 8 weeks. Forms to file 2012 taxes He can deduct only his expenses for meals (subject to the 50% limit) and lodging for the 2 weeks he attended the seminar. Forms to file 2012 taxes Cruises and conventions. Forms to file 2012 taxes   Certain cruises and conventions offer seminars or courses as part of their itinerary. Forms to file 2012 taxes Even if the seminars or courses are work related, your deduction for travel may be limited. Forms to file 2012 taxes This applies to: Travel by ocean liner, cruise ship, or other form of luxury water transportation, and Conventions outside the North American area. Forms to file 2012 taxes   For a discussion of the limits on travel expense deductions that apply to cruises and conventions, see Luxury Water Travel and Conventions in chapter 1 of Publication 463. Forms to file 2012 taxes 50% limit on meals. Forms to file 2012 taxes   You can deduct only 50% of the cost of your meals while traveling away from home to obtain qualifying work-related education. Forms to file 2012 taxes If you were reimbursed for the meals, see How To Treat Reimbursements , later. Forms to file 2012 taxes   Employees must use Form 2106 or Form 2106-EZ to apply the 50% limit. Forms to file 2012 taxes Travel as Education You cannot deduct the cost of travel as a form of education even if it is directly related to your duties in your work or business. Forms to file 2012 taxes Example. Forms to file 2012 taxes You are a French language teacher. Forms to file 2012 taxes While on sabbatical leave granted for travel, you traveled through France to improve your knowledge of the French language. Forms to file 2012 taxes You chose your itinerary and most of your activities to improve your French language skills. Forms to file 2012 taxes You cannot deduct your travel expenses as education expenses. Forms to file 2012 taxes This is true even if you spent most of your time learning French by visiting French schools and families, attending movies or plays, and engaging in similar activities. Forms to file 2012 taxes No Double Benefit Allowed You cannot do either of the following. Forms to file 2012 taxes Deduct work-related education expenses as business expenses if you benefit from these expenses under any other provision of the law, for example, as a tuition and fees deduction. Forms to file 2012 taxes Deduct work-related education expenses paid with tax-free scholarship, grant, or employer-provided educational assistance. Forms to file 2012 taxes See Adjustments to Qualifying Work-Related Education Expenses, next. Forms to file 2012 taxes Adjustments to Qualifying Work-Related Education Expenses If you pay qualifying work-related education expenses with certain tax-free funds, you cannot claim a deduction for those amounts. Forms to file 2012 taxes You must reduce the qualifying expenses by the amount of such expenses allocable to the tax-free educational assistance. Forms to file 2012 taxes Tax-free educational assistance. Forms to file 2012 taxes   This includes: The tax-free part of scholarships and fellowships (see Tax-Free Scholarships and Fellowships in chapter 1, Scholarships, Fellowships, Grants, and Tuition Reductions), Pell grants (see Pell Grants and Other Title IV Need-Based Education Grants in chapter 1, Scholarships, Fellowships, Grants, and Tuition Reductions). Forms to file 2012 taxes Employer-provided educational assistance (see chapter 11, Employer-Provided Educational Assistance ), Veterans' educational assistance (see Veterans' Benefits in chapter 1, Scholarships, Fellowships, Grants, and Tuition Reductions), and Any other nontaxable (tax-free) payments (other than gifts or inheritances) received as educational assistance. Forms to file 2012 taxes Amounts that do not reduce qualifying work-related education expenses. Forms to file 2012 taxes   Do not reduce the qualifying work-related education expenses by amounts paid with funds the student receives as: Payment for services, such as wages, A loan, A gift, An inheritance, or A withdrawal from the student's personal savings. Forms to file 2012 taxes Also, do not reduce the qualifying work-related education expenses by any scholarship or fellowship reported as income on the student's return or any scholarship which, by its terms, cannot be applied to qualifying work-related education expenses. Forms to file 2012 taxes How To Treat Reimbursements How you treat reimbursements depends on the arrangement you have with your employer. Forms to file 2012 taxes There are two basic types of reimbursement arrangements—accountable plans and nonaccountable plans. Forms to file 2012 taxes You can tell the type of plan you are reimbursed under by the way the reimbursement is reported on your Form W-2. Forms to file 2012 taxes Note. Forms to file 2012 taxes The following rules about reimbursement arrangements also apply to expense allowances received from your employer. Forms to file 2012 taxes Accountable Plans To be an accountable plan, your employer's reimbursement arrangement must require you to meet all three of the following rules. Forms to file 2012 taxes Your expenses must have a business connection. Forms to file 2012 taxes This means your expenses must be deductible under the rules for qualifying work-related education explained earlier. Forms to file 2012 taxes You must adequately account to your employer for your expenses within a reasonable period of time. Forms to file 2012 taxes You must return any reimbursement or allowance in excess of the expenses accounted for within a reasonable period of time. Forms to file 2012 taxes If you are reimbursed under an accountable plan, your employer should not include any reimbursement in your income in box 1 of your Form W-2. Forms to file 2012 taxes If your employer included reimbursements in box 1 of your Form W-2 and you meet all three rules for accountable plans, ask your employer for a corrected Form W-2. Forms to file 2012 taxes Accountable plan rules not met. Forms to file 2012 taxes   Even though you are reimbursed under an accountable plan, some of your expenses may not meet all three rules for accountable plans. Forms to file 2012 taxes Those expenses that fail to meet the three rules are treated as having been reimbursed under a Nonaccountable Plan (discussed later). Forms to file 2012 taxes Expenses equal reimbursement. Forms to file 2012 taxes   Under an accountable plan, if your expenses equal your reimbursement, you do not complete Form 2106 or 2106-EZ. Forms to file 2012 taxes Because your expenses and reimbursements are equal, you do not have a deduction. Forms to file 2012 taxes Excess expenses. Forms to file 2012 taxes   If your expenses are more than your reimbursement, you can deduct your excess expenses. Forms to file 2012 taxes This is discussed later, under Deducting Business Expenses . Forms to file 2012 taxes Allocating your reimbursements for meals. Forms to file 2012 taxes   Because your excess meal expenses are subject to the 50% limit, you must figure them separately from your other expenses. Forms to file 2012 taxes If your employer paid you a single amount to cover both meals and other expenses, you must allocate the reimbursement so that you can figure your excess meal expenses separately. Forms to file 2012 taxes Make the allocation as follows. Forms to file 2012 taxes Divide your meal expenses by your total expenses. Forms to file 2012 taxes Multiply your total reimbursement by the result from (1). Forms to file 2012 taxes This is the allocated reimbursement for your meal expenses. Forms to file 2012 taxes Subtract the amount figured in (2) from your total reimbursement. Forms to file 2012 taxes The difference is the allocated reimbursement for your other expenses of qualifying work-related education. Forms to file 2012 taxes Example. Forms to file 2012 taxes Your employer paid you an expense allowance of $2,000 under an accountable plan. Forms to file 2012 taxes The allowance was to cover all of your expenses of traveling away from home to take a 2-week training course for work. Forms to file 2012 taxes There was no indication of how much of the reimbursement was for each type of expense. Forms to file 2012 taxes Your actual expenses equal $2,500 ($425 for meals + $700 lodging + $150 transportation expenses + $1,225 for books and tuition). Forms to file 2012 taxes Using the steps listed above, allocate the reimbursement between the $425 meal expenses and the $2,075 other expenses. Forms to file 2012 taxes   1. Forms to file 2012 taxes $425 meal expenses  $2,500 total expenses = . Forms to file 2012 taxes 17   2. Forms to file 2012 taxes $2,000 (reimbursement)×. Forms to file 2012 taxes 17     =$340 (allocated reimbursement for meal expenses)   3. Forms to file 2012 taxes $2,000 (reimbursement)−$340 (meals)     = $1,660 (allocated reimbursement for other qualifying work-related education expenses) Your excess meal expenses are $85 ($425 − $340) and your excess other expenses are $415 ($2,075 − $1,660). Forms to file 2012 taxes After you apply the 50% limit to your meals, you have a deduction for work-related education expenses of $458 (($85 × 50%) + $415). Forms to file 2012 taxes Nonaccountable Plans Your employer will combine the amount of any reimbursement or other expense allowance paid to you under a nonaccountable plan with your wages, salary, or other pay and report the total in box 1 of your Form W-2. Forms to file 2012 taxes You can deduct your expenses regardless of whether they are more than, less than, or equal to your reimbursement. Forms to file 2012 taxes This is discussed later under Deducting Business Expenses . Forms to file 2012 taxes An illustrated example of a nonaccountable plan, using Form 2106-EZ, is shown at the end of this chapter. Forms to file 2012 taxes Reimbursements for nondeductible expenses. Forms to file 2012 taxes   Reimbursements you received for nondeductible expenses are treated as paid under a nonaccountable plan. Forms to file 2012 taxes You must include them in your income. Forms to file 2012 taxes For example, you must include in your income reimbursements your employer gave you for expenses of education that: You need to meet the minimum educational requirements for your job, or Is part of a program of study that can qualify you for a new trade or business. Forms to file 2012 taxes   For more information on accountable and nonaccountable plans, see chapter 6 of Publication 463. Forms to file 2012 taxes Deducting Business Expenses Self-employed persons and employees report their business expenses differently. Forms to file 2012 taxes The following information explains what forms you must use to deduct the cost of your qualifying work-related education as a business expense. Forms to file 2012 taxes Self-Employed Persons If you are self-employed, you must report the cost of your qualifying work-related education on the appropriate form used to report your business income and expenses (generally Schedule C (Form 1040), Schedule C-EZ (Form 1040), or Schedule F (Form 1040)). Forms to file 2012 taxes If your education expenses include expenses for a car or truck, travel, or meals, report those expenses the same way you report other business expenses for those items. Forms to file 2012 taxes See the instructions for the form you file for information on how to complete it. Forms to file 2012 taxes Employees If you are an employee, you can deduct the cost of qualifying work-related education only if you: Did not receive (and were not entitled to receive) any reimbursement from your employer, Were reimbursed under a nonaccountable plan (amount is included in box 1 of Form W-2), or Received reimbursement under an accountable plan, but the amount received was less than your expenses for which you claimed reimbursement. Forms to file 2012 taxes If either (1) or (2) applies, you can deduct the total qualifying cost. Forms to file 2012 taxes If (3) applies, you can deduct only the qualifying costs that were more than your reimbursement. Forms to file 2012 taxes In order to deduct the cost of your qualifying work-related education as a business expense, include the amount with your deduction for any other employee business expenses on Schedule A (Form 1040), line 21, or Schedule A (Form 1040NR), line 7. Forms to file 2012 taxes (Special rules for expenses of certain performing artists and fee-basis officials and for impairment-related work expenses are explained later. Forms to file 2012 taxes ) This deduction (except for impairment-related work expenses of disabled individuals) is subject to the 2%-of-adjusted-gross-income limit that applies to most miscellaneous itemized deductions. Forms to file 2012 taxes Form 2106 or 2106-EZ. Forms to file 2012 taxes   To figure your deduction for employee business expenses, including qualifying work-related education, you generally must complete Form 2106 or 2106-EZ. Forms to file 2012 taxes Form not required. Forms to file 2012 taxes   Do not complete either Form 2106 or 2106-EZ if: All reimbursements, if any, are included in box 1 of your Form W-2, and You are not claiming travel, transportation, meal, or entertainment expenses. Forms to file 2012 taxes   If you meet both of these requirements, enter the expenses directly on Schedule A (Form 1040), line 21, or Schedule A (Form 1040NR), line 7. Forms to file 2012 taxes (Special rules for expenses of certain Performing Artists and Fee-Basis Officials and for Impairment-Related Work Expenses are explained later. Forms to file 2012 taxes ) Using Form 2106-EZ. Forms to file 2012 taxes   This form is shorter and easier to use than Form 2106. Forms to file 2012 taxes Generally, you can use this form if: All reimbursements, if any, are included in box 1 of your Form W-2, and You are using the standard mileage rate if you are claiming vehicle expenses. Forms to file 2012 taxes   If you do not meet both of these requirements, use Form 2106. Forms to file 2012 taxes Performing Artists and Fee-Basis Officials If you are a qualified performing artist, or a state (or local) government official who is paid in whole or in part on a fee basis, you can deduct the cost of your qualifying work-related education as an adjustment to gross income rather than as an itemized deduction. Forms to file 2012 taxes Include the cost of your qualifying work-related education with any other employee business expenses on Form 1040, line 24, or Form 1040NR, line 35. Forms to file 2012 taxes You do not have to itemize your deductions on Schedule A (Form 1040 or 1040NR), and, therefore, the deduction is not subject to the 2%-of-adjusted-gross-income limit. Forms to file 2012 taxes You must complete Form 2106 or 2106-EZ to figure your deduction even if you meet the requirements described earlier under Form not required . Forms to file 2012 taxes For more information on qualified performing artists, see chapter 6 of Publication 463. Forms to file 2012 taxes Impairment-Related Work Expenses If you are disabled and have impairment-related work expenses that are necessary for you to be able to get qualifying work-related education, you can deduct these expenses on Schedule A (Form 1040), line 28, or Schedule A (Form 1040NR), line 14. Forms to file 2012 taxes They are not subject to the 2%-of-adjusted-gross-income limit. Forms to file 2012 taxes To deduct these expenses, you must complete Form 2106 or 2106-EZ even if you meet the requirements described earlier under Form not required . Forms to file 2012 taxes For more information on impairment-related work expenses, see chapter 6 of Publication 463. Forms to file 2012 taxes Recordkeeping You must keep records as proof of any deduction claimed on your tax return. Forms to file 2012 taxes Generally, you should keep your records for 3 years from the date of filing the tax return and claiming the deduction. Forms to file 2012 taxes If you are an employee who is reimbursed for expenses and you give your records and documentation to your employer, you do not have to keep duplicate copies of this information. Forms to file 2012 taxes However, you should keep your records for a 3-year period if: You claim deductions for expenses that are more than your reimbursement, Your employer does not use adequate accounting procedures to verify expense accounts, You are related to your employer, or Your expenses are reimbursed under a nonaccountable plan. Forms to file 2012 taxes Examples of records to keep. Forms to file 2012 taxes   If any of the above cases apply to you, you must be able to prove that your expenses are deductible. Forms to file 2012 taxes You should keep adequate records or have sufficient evidence that will support your expenses. Forms to file 2012 taxes Estimates or approximations do not qualify as proof of an expense. Forms to file 2012 taxes Some examples of what can be used to help prove your expenses are: Documents, such as transcripts, course descriptions, catalogs, etc. Forms to file 2012 taxes , showing periods of enrollment in educational institutions, principal subjects studied, and descriptions of educational activity. Forms to file 2012 taxes Canceled checks and receipts to verify amounts you spent for: Tuition and books, Meals and lodging while away from home overnight for educational purposes, Travel and transportation, and Other education expenses. Forms to file 2012 taxes Statements from your employer explaining whether the education was necessary for you to keep your job, salary, or status; how the education helped maintain or improve skills needed in your job; how much reimbursement you received; and, if you are a teacher, the type of certificate and subjects taught. Forms to file 2012 taxes Complete information about any scholarship or fellowship grants, including amounts you received during the year. Forms to file 2012 taxes Illustrated Example Victor Jones teaches math at a private high school in North Carolina. Forms to file 2012 taxes He was selected to attend a 3-week math seminar at a university in California. Forms to file 2012 taxes The seminar will improve his skills in his current job and is qualifying work-related education. Forms to file 2012 taxes He was reimbursed for his expenses under his employer's nonaccountable plan, so his reimbursement of $2,100 is included in the wages shown in box 1 of his Form W-2. Forms to file 2012 taxes Victor will file Form 1040. Forms to file 2012 taxes His actual expenses for the seminar are as follows:   Lodging   $1,050     Meals   526     Airfare   550     Taxi fares   50     Tuition and books   400     Total Expenses   $2,576   Victor files Form 2106-EZ with his tax return. Forms to file 2012 taxes He shows his expenses for the seminar in Part I of the form. Forms to file 2012 taxes He enters $1,650 ($1,050 + $550 + $50) on line 3 to account for his lodging, airfare, and taxi fares. Forms to file 2012 taxes He enters $400 on line 4 for his tuition and books. Forms to file 2012 taxes On the line provided for total meals and entertainment expenses, Victor enters $526 for meal expenses. Forms to file 2012 taxes He multiplies that amount by 50% and enters the result, $263, on line 5. Forms to file 2012 taxes On line 6, Victor totals the amounts from lines 3 through 5. Forms to file 2012 taxes He carries the total, $2,313, to Schedule A (Form 1040), line 21. Forms to file 2012 taxes Since he does not claim any vehicle expenses, Victor leaves Part II blank. Forms to file 2012 taxes His filled-in form is shown on the next page. Forms to file 2012 taxes This image is too large to be displayed in the current screen. Forms to file 2012 taxes Please click the link to view the image. Forms to file 2012 taxes Form 2106-EZ for V. Forms to file 2012 taxes Jones Prev  Up  Next   Home   More Online Publications
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The Forms To File 2012 Taxes

Forms to file 2012 taxes 4. Forms to file 2012 taxes   Interest Table of Contents Introduction Topics - This chapter discusses: Useful Items - You may want to see: Allocation of InterestOrder of funds spent. Forms to file 2012 taxes Payments from checking accounts. Forms to file 2012 taxes Amounts paid within 30 days. Forms to file 2012 taxes Optional method for determining date of reallocation. Forms to file 2012 taxes Interest on a segregated account. Forms to file 2012 taxes How to report. Forms to file 2012 taxes Interest You Can DeductStatement. Forms to file 2012 taxes Expenses paid to obtain a mortgage. Forms to file 2012 taxes Prepayment penalty. Forms to file 2012 taxes De minimis OID. Forms to file 2012 taxes Constant-yield method. Forms to file 2012 taxes Loan or mortgage ends. Forms to file 2012 taxes Interest You Cannot DeductPenalties. Forms to file 2012 taxes Who is a key person? Exceptions for pre-June 1997 contracts. Forms to file 2012 taxes Interest allocated to unborrowed policy cash value. Forms to file 2012 taxes Capitalization of Interest When To Deduct InterestPrepaid interest. Forms to file 2012 taxes Discounted loan. Forms to file 2012 taxes Refunds of interest. Forms to file 2012 taxes Prepaid interest. Forms to file 2012 taxes Discounted loan. Forms to file 2012 taxes Tax deficiency. Forms to file 2012 taxes Related person. Forms to file 2012 taxes Below-Market LoansLimit on forgone interest for gift loans of $100,000 or less. Forms to file 2012 taxes Introduction This chapter discusses the tax treatment of business interest expense. Forms to file 2012 taxes Business interest expense is an amount charged for the use of money you borrowed for business activities. Forms to file 2012 taxes Topics - This chapter discusses: Allocation of interest Interest you can deduct Interest you cannot deduct Capitalization of interest When to deduct interest Below-market loans Useful Items - You may want to see: Publication 537 Installment Sales 550 Investment Income and Expenses 936 Home Mortgage Interest Deduction Form (and Instructions) Sch A (Form 1040) Itemized Deductions Sch E (Form 1040) Supplemental Income and Loss Sch K-1 (Form 1065) Partner's Share of Income, Deductions, Credits, etc. Forms to file 2012 taxes Sch K-1 (Form 1120S) Shareholder's Share of Income, Deductions, Credits, etc. Forms to file 2012 taxes 1098 Mortgage Interest Statement 3115 Application for Change in Accounting Method 4952 Investment Interest Expense Deduction 8582 Passive Activity Loss Limitations See chapter 12 for information about getting publications and forms. Forms to file 2012 taxes Allocation of Interest The rules for deducting interest vary, depending on whether the loan proceeds are used for business, personal, or investment activities. Forms to file 2012 taxes If you use the proceeds of a loan for more than one type of expense, you must allocate the interest based on the use of the loan's proceeds. Forms to file 2012 taxes Allocate your interest expense to the following categories. Forms to file 2012 taxes Nonpassive trade or business activity interest Passive trade or business activity interest Investment interest Portfolio interest Personal interest In general, you allocate interest on a loan the same way you allocate the loan proceeds. Forms to file 2012 taxes You allocate loan proceeds by tracing disbursements to specific uses. Forms to file 2012 taxes The easiest way to trace disbursements to specific uses is to keep the proceeds of a particular loan separate from any other funds. Forms to file 2012 taxes Secured loan. Forms to file 2012 taxes   The allocation of loan proceeds and the related interest is not generally affected by the use of property that secures the loan. Forms to file 2012 taxes Example. Forms to file 2012 taxes You secure a loan with property used in your business. Forms to file 2012 taxes You use the loan proceeds to buy an automobile for personal use. Forms to file 2012 taxes You must allocate interest expense on the loan to personal use (purchase of the automobile) even though the loan is secured by business property. Forms to file 2012 taxes    If the property that secures the loan is your home, you generally do not allocate the loan proceeds or the related interest. Forms to file 2012 taxes The interest is usually deductible as qualified home mortgage interest, regardless of how the loan proceeds are used. Forms to file 2012 taxes For more information, see Publication 936. Forms to file 2012 taxes Allocation period. Forms to file 2012 taxes   The period for which a loan is allocated to a particular use begins on the date the proceeds are used and ends on the earlier of the following dates. Forms to file 2012 taxes The date the loan is repaid. Forms to file 2012 taxes The date the loan is reallocated to another use. Forms to file 2012 taxes Proceeds not disbursed to borrower. Forms to file 2012 taxes   Even if the lender disburses the loan proceeds to a third party, the allocation of the loan is still based on your use of the funds. Forms to file 2012 taxes This applies whether you pay for property, services, or anything else by incurring a loan, or you take property subject to a debt. Forms to file 2012 taxes Proceeds deposited in borrower's account. Forms to file 2012 taxes   Treat loan proceeds deposited in an account as property held for investment. Forms to file 2012 taxes It does not matter whether the account pays interest. Forms to file 2012 taxes Any interest you pay on the loan is investment interest expense. Forms to file 2012 taxes If you withdraw the proceeds of the loan, you must reallocate the loan based on the use of the funds. Forms to file 2012 taxes Example. Forms to file 2012 taxes Celina, a calendar-year taxpayer, borrows $100,000 on January 4 and immediately uses the proceeds to open a checking account. Forms to file 2012 taxes No other amounts are deposited in the account during the year and no part of the loan principal is repaid during the year. Forms to file 2012 taxes On April 2, Celina uses $20,000 from the checking account for a passive activity expenditure. Forms to file 2012 taxes On September 4, Celina uses an additional $40,000 from the account for personal purposes. Forms to file 2012 taxes Under the interest allocation rules, the entire $100,000 loan is treated as property held for investment for the period from January 4 through April 1. Forms to file 2012 taxes From April 2 through September 3, Celina must treat $20,000 of the loan as used in the passive activity and $80,000 of the loan as property held for investment. Forms to file 2012 taxes From September 4 through December 31, she must treat $40,000 of the loan as used for personal purposes, $20,000 as used in the passive activity, and $40,000 as property held for investment. Forms to file 2012 taxes Order of funds spent. Forms to file 2012 taxes   Generally, you treat loan proceeds deposited in an account as used (spent) before either of the following amounts. Forms to file 2012 taxes Any unborrowed amounts held in the same account. Forms to file 2012 taxes Any amounts deposited after these loan proceeds. Forms to file 2012 taxes Example. Forms to file 2012 taxes On January 9, Olena opened a checking account, depositing $500 of the proceeds of Loan A and $1,000 of unborrowed funds. Forms to file 2012 taxes The following table shows the transactions in her account during the tax year. Forms to file 2012 taxes Date Transaction January 9 $500 proceeds of Loan A and $1,000 unborrowed funds deposited January 14 $500 proceeds of Loan B  deposited February 19 $800 used for personal purposes February 27 $700 used for passive activity June 19 $1,000 proceeds of Loan C  deposited November 20 $800 used for an investment December 18 $600 used for personal purposes Olena treats the $800 used for personal purposes as made from the $500 proceeds of Loan A and $300 of the proceeds of Loan B. Forms to file 2012 taxes She treats the $700 used for a passive activity as made from the remaining $200 proceeds of Loan B and $500 of unborrowed funds. Forms to file 2012 taxes She treats the $800 used for an investment as made entirely from the proceeds of Loan C. Forms to file 2012 taxes She treats the $600 used for personal purposes as made from the remaining $200 proceeds of Loan C and $400 of unborrowed funds. Forms to file 2012 taxes For the periods during which loan proceeds are held in the account, Olena treats them as property held for investment. Forms to file 2012 taxes Payments from checking accounts. Forms to file 2012 taxes   Generally, you treat a payment from a checking or similar account as made at the time the check is written if you mail or deliver it to the payee within a reasonable period after you write it. Forms to file 2012 taxes You can treat checks written on the same day as written in any order. Forms to file 2012 taxes Amounts paid within 30 days. Forms to file 2012 taxes   If you receive loan proceeds in cash or if the loan proceeds are deposited in an account, you can treat any payment (up to the amount of the proceeds) made from any account you own, or from cash, as made from those proceeds. Forms to file 2012 taxes This applies to any payment made within 30 days before or after the proceeds are received in cash or deposited in your account. Forms to file 2012 taxes   If the loan proceeds are deposited in an account, you can apply this rule even if the rules stated earlier under Order of funds spent would otherwise require you to treat the proceeds as used for other purposes. Forms to file 2012 taxes If you apply this rule to any payments, disregard those payments (and the proceeds from which they are made) when applying the rules stated under Order of funds spent. Forms to file 2012 taxes   If you received the loan proceeds in cash, you can treat the payment as made on the date you received the cash instead of the date you actually made the payment. Forms to file 2012 taxes Example. Forms to file 2012 taxes Giovanni gets a loan of $1,000 on August 4 and receives the proceeds in cash. Forms to file 2012 taxes Giovanni deposits $1,500 in an account on August 18 and on August 28 writes a check on the account for a passive activity expense. Forms to file 2012 taxes Also, Giovanni deposits his paycheck, deposits other loan proceeds, and pays his bills during the same period. Forms to file 2012 taxes Regardless of these other transactions, Giovanni can treat $1,000 of the deposit he made on August 18 as being paid on August 4 from the loan proceeds. Forms to file 2012 taxes In addition, Giovanni can treat the passive activity expense he paid on August 28 as made from the $1,000 loan proceeds treated as deposited in the account. Forms to file 2012 taxes Optional method for determining date of reallocation. Forms to file 2012 taxes   You can use the following method to determine the date loan proceeds are reallocated to another use. Forms to file 2012 taxes You can treat all payments from loan proceeds in the account during any month as taking place on the later of the following dates. Forms to file 2012 taxes The first day of that month. Forms to file 2012 taxes The date the loan proceeds are deposited in the account. Forms to file 2012 taxes However, you can use this optional method only if you treat all payments from the account during the same calendar month in the same way. Forms to file 2012 taxes Interest on a segregated account. Forms to file 2012 taxes   If you have an account that contains only loan proceeds and interest earned on the account, you can treat any payment from that account as being made first from the interest. Forms to file 2012 taxes When the interest earned is used up, any remaining payments are from loan proceeds. Forms to file 2012 taxes Example. Forms to file 2012 taxes You borrowed $20,000 and used the proceeds of this loan to open a new savings account. Forms to file 2012 taxes When the account had earned interest of $867, you withdrew $20,000 for personal purposes. Forms to file 2012 taxes You can treat the withdrawal as coming first from the interest earned on the account, $867, and then from the loan proceeds, $19,133 ($20,000 − $867). Forms to file 2012 taxes All the interest charged on the loan from the time it was deposited in the account until the time of the withdrawal is investment interest expense. Forms to file 2012 taxes The interest charged on the part of the proceeds used for personal purposes ($19,133) from the time you withdrew it until you either repay it or reallocate it to another use is personal interest expense. Forms to file 2012 taxes The interest charged on the loan proceeds you left in the account ($867) continues to be investment interest expense until you either repay it or reallocate it to another use. Forms to file 2012 taxes Loan repayment. Forms to file 2012 taxes   When you repay any part of a loan allocated to more than one use, treat it as being repaid in the following order. Forms to file 2012 taxes Personal use. Forms to file 2012 taxes Investments and passive activities (other than those included in (3)). Forms to file 2012 taxes Passive activities in connection with a rental real estate activity in which you actively participate. Forms to file 2012 taxes Former passive activities. Forms to file 2012 taxes Trade or business use and expenses for certain low-income housing projects. Forms to file 2012 taxes Line of credit (continuous borrowings). Forms to file 2012 taxes   The following rules apply if you have a line of credit or similar arrangement. Forms to file 2012 taxes Treat all borrowed funds on which interest accrues at the same fixed or variable rate as a single loan. Forms to file 2012 taxes Treat borrowed funds or parts of borrowed funds on which interest accrues at different fixed or variable rates as different loans. Forms to file 2012 taxes Treat these loans as repaid in the order shown on the loan agreement. Forms to file 2012 taxes Loan refinancing. Forms to file 2012 taxes   Allocate the replacement loan to the same uses to which the repaid loan was allocated. Forms to file 2012 taxes Make the allocation only to the extent you use the proceeds of the new loan to repay any part of the original loan. Forms to file 2012 taxes Debt-financed distribution. Forms to file 2012 taxes   A debt-financed distribution occurs when a partnership or S corporation borrows funds and allocates those funds to distributions made to partners or shareholders. Forms to file 2012 taxes The manner in which you report the interest expense associated with the distributed debt proceeds depends on your use of those proceeds. Forms to file 2012 taxes How to report. Forms to file 2012 taxes   If the proceeds were used in a nonpassive trade or business activity, report the interest on Schedule E (Form 1040), line 28; enter “interest expense” and the name of the partnership or S corporation in column (a) and the amount in column (h). Forms to file 2012 taxes If the proceeds were used in a passive activity, follow the Instructions for Form 8582, Passive Activity Loss Limitations, to determine the amount of interest expense that can be reported on Schedule E (Form 1040), line 28; enter “interest expense” and the name of the partnership in column (a) and the amount in column (f). Forms to file 2012 taxes If the proceeds were used in an investment activity, enter the interest on Form 4952. Forms to file 2012 taxes If the proceeds are used for personal purposes, the interest is generally not deductible. Forms to file 2012 taxes Interest You Can Deduct You can generally deduct as a business expense all interest you pay or accrue during the tax year on debts related to your trade or business. Forms to file 2012 taxes Interest relates to your trade or business if you use the proceeds of the loan for a trade or business expense. Forms to file 2012 taxes It does not matter what type of property secures the loan. Forms to file 2012 taxes You can deduct interest on a debt only if you meet all the following requirements. Forms to file 2012 taxes You are legally liable for that debt. Forms to file 2012 taxes Both you and the lender intend that the debt be repaid. Forms to file 2012 taxes You and the lender have a true debtor-creditor relationship. Forms to file 2012 taxes Partial liability. Forms to file 2012 taxes   If you are liable for part of a business debt, you can deduct only your share of the total interest paid or accrued. Forms to file 2012 taxes Example. Forms to file 2012 taxes You and your brother borrow money. Forms to file 2012 taxes You are liable for 50% of the note. Forms to file 2012 taxes You use your half of the loan in your business, and you make one-half of the loan payments. Forms to file 2012 taxes You can deduct your half of the total interest payments as a business deduction. Forms to file 2012 taxes Mortgage. Forms to file 2012 taxes   Generally, mortgage interest paid or accrued on real estate you own legally or equitably is deductible. Forms to file 2012 taxes However, rather than deducting the interest currently, you may have to add it to the cost basis of the property as explained later under Capitalization of Interest. Forms to file 2012 taxes Statement. Forms to file 2012 taxes   If you paid $600 or more of mortgage interest (including certain points) during the year on any one mortgage, you generally will receive a Form 1098 or a similar statement. Forms to file 2012 taxes You will receive the statement if you pay interest to a person (including a financial institution or a cooperative housing corporation) in the course of that person's trade or business. Forms to file 2012 taxes A governmental unit is a person for purposes of furnishing the statement. Forms to file 2012 taxes   If you receive a refund of interest you overpaid in an earlier year, this amount will be reported in box 3 of Form 1098. Forms to file 2012 taxes You cannot deduct this amount. Forms to file 2012 taxes For information on how to report this refund, see Refunds of interest, later in this chapter. Forms to file 2012 taxes Expenses paid to obtain a mortgage. Forms to file 2012 taxes   Certain expenses you pay to obtain a mortgage cannot be deducted as interest. Forms to file 2012 taxes These expenses, which include mortgage commissions, abstract fees, and recording fees, are capital expenses. Forms to file 2012 taxes If the property mortgaged is business or income-producing property, you can amortize the costs over the life of the mortgage. Forms to file 2012 taxes Prepayment penalty. Forms to file 2012 taxes   If you pay off your mortgage early and pay the lender a penalty for doing this, you can deduct the penalty as interest. Forms to file 2012 taxes Interest on employment tax deficiency. Forms to file 2012 taxes   Interest charged on employment taxes assessed on your business is deductible. Forms to file 2012 taxes Original issue discount (OID). Forms to file 2012 taxes   OID is a form of interest. Forms to file 2012 taxes A loan (mortgage or other debt) generally has OID when its proceeds are less than its principal amount. Forms to file 2012 taxes The OID is the difference between the stated redemption price at maturity and the issue price of the loan. Forms to file 2012 taxes   A loan's stated redemption price at maturity is the sum of all amounts (principal and interest) payable on it other than qualified stated interest. Forms to file 2012 taxes Qualified stated interest is stated interest that is unconditionally payable in cash or property (other than another loan of the issuer) at least annually over the term of the loan at a single fixed rate. Forms to file 2012 taxes You generally deduct OID over the term of the loan. Forms to file 2012 taxes Figure the amount to deduct each year using the constant-yield method, unless the OID on the loan is de minimis. Forms to file 2012 taxes De minimis OID. Forms to file 2012 taxes   The OID is de minimis if it is less than one-fourth of 1% (. Forms to file 2012 taxes 0025) of the stated redemption price of the loan at maturity multiplied by the number of full years from the date of original issue to maturity (the term of the loan). Forms to file 2012 taxes   If the OID is de minimis, you can choose one of the following ways to figure the amount you can deduct each year. Forms to file 2012 taxes On a constant-yield basis over the term of the loan. Forms to file 2012 taxes On a straight-line basis over the term of the loan. Forms to file 2012 taxes In proportion to stated interest payments. Forms to file 2012 taxes In its entirety at maturity of the loan. Forms to file 2012 taxes You make this choice by deducting the OID in a manner consistent with the method chosen on your timely filed tax return for the tax year in which the loan is issued. Forms to file 2012 taxes Example. Forms to file 2012 taxes On January 1, 2013, you took out a $100,000 discounted loan and received $98,500 in proceeds. Forms to file 2012 taxes The loan will mature on January 1, 2023 (a 10-year term), and the $100,000 principal is payable on that date. Forms to file 2012 taxes Interest of $10,000 is payable on January 1 of each year, beginning January 1, 2014. Forms to file 2012 taxes The $1,500 OID on the loan is de minimis because it is less than $2,500 ($100,000 × . Forms to file 2012 taxes 0025 × 10). Forms to file 2012 taxes You choose to deduct the OID on a straight-line basis over the term of the loan. Forms to file 2012 taxes Beginning in 2013, you can deduct $150 each year for 10 years. Forms to file 2012 taxes Constant-yield method. Forms to file 2012 taxes   If the OID is not de minimis, you must use the constant-yield method to figure how much you can deduct each year. Forms to file 2012 taxes You figure your deduction for the first year using the following steps. Forms to file 2012 taxes Determine the issue price of the loan. Forms to file 2012 taxes Generally, this equals the proceeds of the loan. Forms to file 2012 taxes If you paid points on the loan (as discussed later), the issue price generally is the difference between the proceeds and the points. Forms to file 2012 taxes Multiply the result in (1) by the yield to maturity. Forms to file 2012 taxes Subtract any qualified stated interest payments from the result in (2). Forms to file 2012 taxes This is the OID you can deduct in the first year. Forms to file 2012 taxes   To figure your deduction in any subsequent year, follow the above steps, except determine the adjusted issue price in step (1). Forms to file 2012 taxes To get the adjusted issue price, add to the issue price any OID previously deducted. Forms to file 2012 taxes Then follow steps (2) and (3) above. Forms to file 2012 taxes   The yield to maturity is generally shown in the literature you receive from your lender. Forms to file 2012 taxes If you do not have this information, consult your lender or tax advisor. Forms to file 2012 taxes In general, the yield to maturity is the discount rate that, when used in computing the present value of all principal and interest payments, produces an amount equal to the principal amount of the loan. Forms to file 2012 taxes Example. Forms to file 2012 taxes The facts are the same as in the previous example, except that you deduct the OID on a constant yield basis over the term of the loan. Forms to file 2012 taxes The yield to maturity on your loan is 10. Forms to file 2012 taxes 2467%, compounded annually. Forms to file 2012 taxes For 2013, you can deduct $93 [($98,500 × . Forms to file 2012 taxes 102467) − $10,000]. Forms to file 2012 taxes For 2014, you can deduct $103 [($98,593 × . Forms to file 2012 taxes 102467) − $10,000]. Forms to file 2012 taxes Loan or mortgage ends. Forms to file 2012 taxes   If your loan or mortgage ends, you may be able to deduct any remaining OID in the tax year in which the loan or mortgage ends. Forms to file 2012 taxes A loan or mortgage may end due to a refinancing, prepayment, foreclosure, or similar event. Forms to file 2012 taxes If you refinance with the original lender, you generally cannot deduct the remaining OID in the year in which the refinancing occurs, but you may be able to deduct it over the term of the new mortgage or loan. Forms to file 2012 taxes See Interest paid with funds borrowed from original lender under Interest You Cannot Deduct, later. Forms to file 2012 taxes Points. Forms to file 2012 taxes   The term “points” is used to describe certain charges paid, or treated as paid, by a borrower to obtain a loan or a mortgage. Forms to file 2012 taxes These charges are also called loan origination fees, maximum loan charges, discount points, or premium charges. Forms to file 2012 taxes If any of these charges (points) are solely for the use of money, they are interest. Forms to file 2012 taxes   Because points are prepaid interest, you generally cannot deduct the full amount in the year paid. Forms to file 2012 taxes However, you can choose to fully deduct points in the year paid if you meet certain tests. Forms to file 2012 taxes For exceptions to the general rule, see Publication 936. Forms to file 2012 taxes The points reduce the issue price of the loan and result in original issue discount (OID), deductible as explained in the preceding discussion. Forms to file 2012 taxes Partial payments on a nontax debt. Forms to file 2012 taxes   If you make partial payments on a debt (other than a debt owed the IRS), the payments are applied, in general, first to interest and any remainder to principal. Forms to file 2012 taxes You can deduct only the interest. Forms to file 2012 taxes This rule does not apply when it can be inferred that the borrower and lender understood that a different allocation of the payments would be made. Forms to file 2012 taxes Installment purchase. Forms to file 2012 taxes   If you make an installment purchase of business property, the contract between you and the seller generally provides for the payment of interest. Forms to file 2012 taxes If no interest or a low rate of interest is charged under the contract, a portion of the stated principal amount payable under the contract may be recharacterized as interest (unstated interest). Forms to file 2012 taxes The amount recharacterized as interest reduces your basis in the property and increases your interest expense. Forms to file 2012 taxes For more information on installment sales and unstated interest, see Publication 537. Forms to file 2012 taxes Interest You Cannot Deduct Certain interest payments cannot be deducted. Forms to file 2012 taxes In addition, certain other expenses that may seem to be interest but are not, cannot be deducted as interest. Forms to file 2012 taxes You cannot currently deduct interest that must be capitalized, and you generally cannot deduct personal interest. Forms to file 2012 taxes Interest paid with funds borrowed from original lender. Forms to file 2012 taxes   If you use the cash method of accounting, you cannot deduct interest you pay with funds borrowed from the original lender through a second loan, an advance, or any other arrangement similar to a loan. Forms to file 2012 taxes You can deduct the interest expense once you start making payments on the new loan. Forms to file 2012 taxes   When you make a payment on the new loan, you first apply the payment to interest and then to the principal. Forms to file 2012 taxes All amounts you apply to the interest on the first loan are deductible, along with any interest you pay on the second loan, subject to any limits that apply. Forms to file 2012 taxes Capitalized interest. Forms to file 2012 taxes   You cannot currently deduct interest you are required to capitalize under the uniform capitalization rules. Forms to file 2012 taxes See Capitalization of Interest, later. Forms to file 2012 taxes In addition, if you buy property and pay interest owed by the seller (for example, by assuming the debt and any interest accrued on the property), you cannot deduct the interest. Forms to file 2012 taxes Add this interest to the basis of the property. Forms to file 2012 taxes Commitment fees or standby charges. Forms to file 2012 taxes   Fees you incur to have business funds available on a standby basis, but not for the actual use of the funds, are not deductible as interest payments. Forms to file 2012 taxes You may be able to deduct them as business expenses. Forms to file 2012 taxes   If the funds are for inventory or certain property used in your business, the fees are indirect costs and you generally must capitalize them under the uniform capitalization rules. Forms to file 2012 taxes See Capitalization of Interest, later. Forms to file 2012 taxes Interest on income tax. Forms to file 2012 taxes   Interest charged on income tax assessed on your individual income tax return is not a business deduction even though the tax due is related to income from your trade or business. Forms to file 2012 taxes Treat this interest as a business deduction only in figuring a net operating loss deduction. Forms to file 2012 taxes Penalties. Forms to file 2012 taxes   Penalties on underpaid deficiencies and underpaid estimated tax are not interest. Forms to file 2012 taxes You cannot deduct them. Forms to file 2012 taxes Generally, you cannot deduct any fines or penalties. Forms to file 2012 taxes Interest on loans with respect to life insurance policies. Forms to file 2012 taxes   You generally cannot deduct interest on a debt incurred with respect to any life insurance, annuity, or endowment contract that covers any individual unless that individual is a key person. Forms to file 2012 taxes   If the policy or contract covers a key person, you can deduct the interest on up to $50,000 of debt for that person. Forms to file 2012 taxes However, the deduction for any month cannot be more than the interest figured using Moody's Composite Yield on Seasoned Corporate Bonds (formerly known as Moody's Corporate Bond Yield Average-Monthly Average Corporates) (Moody's rate) for that month. Forms to file 2012 taxes Who is a key person?   A key person is an officer or 20% owner. Forms to file 2012 taxes However, the number of individuals you can treat as key persons is limited to the greater of the following. Forms to file 2012 taxes Five individuals. Forms to file 2012 taxes The lesser of 5% of the total officers and employees of the company or 20 individuals. Forms to file 2012 taxes Exceptions for pre-June 1997 contracts. Forms to file 2012 taxes   You can generally deduct the interest if the contract was issued before June 9, 1997, and the covered individual is someone other than an employee, officer, or someone financially interested in your business. Forms to file 2012 taxes If the contract was purchased before June 21, 1986, you can generally deduct the interest no matter who is covered by the contract. Forms to file 2012 taxes Interest allocated to unborrowed policy cash value. Forms to file 2012 taxes   Corporations and partnerships generally cannot deduct any interest expense allocable to unborrowed cash values of life insurance, annuity, or endowment contracts. Forms to file 2012 taxes This rule applies to contracts issued after June 8, 1997, that cover someone other than an officer, director, employee, or 20% owner. Forms to file 2012 taxes For more information, see section 264(f) of the Internal Revenue Code. Forms to file 2012 taxes Capitalization of Interest Under the uniform capitalization rules, you generally must capitalize interest on debt equal to your expenditures to produce real property or certain tangible personal property. Forms to file 2012 taxes The property must be produced by you for use in your trade or business or for sale to customers. Forms to file 2012 taxes You cannot capitalize interest related to property that you acquire in any other manner. Forms to file 2012 taxes Interest you paid or incurred during the production period must be capitalized if the property produced is designated property. Forms to file 2012 taxes Designated property is any of the following. Forms to file 2012 taxes Real property. Forms to file 2012 taxes Tangible personal property with a class life of 20 years or more. Forms to file 2012 taxes Tangible personal property with an estimated production period of more than 2 years. Forms to file 2012 taxes Tangible personal property with an estimated production period of more than 1 year if the estimated cost of production is more than $1 million. Forms to file 2012 taxes Property you produce. Forms to file 2012 taxes   You produce property if you construct, build, install, manufacture, develop, improve, create, raise, or grow it. Forms to file 2012 taxes Treat property produced for you under a contract as produced by you up to the amount you pay or incur for the property. Forms to file 2012 taxes Carrying charges. Forms to file 2012 taxes   Carrying charges include taxes you pay to carry or develop real estate or to carry, transport, or install personal property. Forms to file 2012 taxes You can choose to capitalize carrying charges not subject to the uniform capitalization rules if they are otherwise deductible. Forms to file 2012 taxes For more information, see chapter 7. Forms to file 2012 taxes Capitalized interest. Forms to file 2012 taxes   Treat capitalized interest as a cost of the property produced. Forms to file 2012 taxes You recover your interest when you sell or use the property. Forms to file 2012 taxes If the property is inventory, recover capitalized interest through cost of goods sold. Forms to file 2012 taxes If the property is used in your trade or business, recover capitalized interest through an adjustment to basis, depreciation, amortization, or other method. Forms to file 2012 taxes Partnerships and S corporations. Forms to file 2012 taxes   The interest capitalization rules are applied first at the partnership or S corporation level. Forms to file 2012 taxes The rules are then applied at the partners' or shareholders' level to the extent the partnership or S corporation has insufficient debt to support the production or construction costs. Forms to file 2012 taxes   If you are a partner or a shareholder, you may have to capitalize interest you incur during the tax year for the production costs of the partnership or S corporation. Forms to file 2012 taxes You may also have to capitalize interest incurred by the partnership or S corporation for your own production costs. Forms to file 2012 taxes To properly capitalize interest under these rules, you must be given the required information in an attachment to the Schedule K-1 you receive from the partnership or S corporation. Forms to file 2012 taxes Additional information. Forms to file 2012 taxes   The procedures for applying the uniform capitalization rules are beyond the scope of this publication. Forms to file 2012 taxes For more information, see sections 1. Forms to file 2012 taxes 263A-8 through 1. Forms to file 2012 taxes 263A-15 of the regulations and Notice 88-99. Forms to file 2012 taxes Notice 88-99 is in Cumulative Bulletin 1988-2. Forms to file 2012 taxes When To Deduct Interest If the uniform capitalization rules, discussed under Capitalization of Interest, earlier, do not apply to you, deduct interest as follows. Forms to file 2012 taxes Cash method. Forms to file 2012 taxes   Under the cash method, you can generally deduct only the interest you actually paid during the tax year. Forms to file 2012 taxes You cannot deduct a promissory note you gave as payment because it is a promise to pay and not an actual payment. Forms to file 2012 taxes Prepaid interest. Forms to file 2012 taxes   You generally cannot deduct any interest paid before the year it is due. Forms to file 2012 taxes Interest paid in advance can be deducted only in the tax year in which it is due. Forms to file 2012 taxes Discounted loan. Forms to file 2012 taxes   If interest or a discount is subtracted from your loan proceeds, it is not a payment of interest and you cannot deduct it when you get the loan. Forms to file 2012 taxes For more information, see Original issue discount (OID) under Interest You Can Deduct, earlier. Forms to file 2012 taxes Refunds of interest. Forms to file 2012 taxes   If you pay interest and then receive a refund in the same tax year of any part of the interest, reduce your interest deduction by the refund. Forms to file 2012 taxes If you receive the refund in a later tax year, include the refund in your income to the extent the deduction for the interest reduced your tax. Forms to file 2012 taxes Accrual method. Forms to file 2012 taxes   Under an accrual method, you can deduct only interest that has accrued during the tax year. Forms to file 2012 taxes Prepaid interest. Forms to file 2012 taxes   See Prepaid interest, earlier. Forms to file 2012 taxes Discounted loan. Forms to file 2012 taxes   See Discounted loan, earlier. Forms to file 2012 taxes Tax deficiency. Forms to file 2012 taxes   If you contest a federal income tax deficiency, interest does not accrue until the tax year the final determination of liability is made. Forms to file 2012 taxes If you do not contest the deficiency, then the interest accrues in the year the tax was asserted and agreed to by you. Forms to file 2012 taxes   However, if you contest but pay the proposed tax deficiency and interest, and you do not designate the payment as a cash bond, then the interest is deductible in the year paid. Forms to file 2012 taxes Related person. Forms to file 2012 taxes   If you use an accrual method, you cannot deduct interest owed to a related person who uses the cash method until payment is made and the interest is includible in the gross income of that person. Forms to file 2012 taxes The relationship is determined as of the end of the tax year for which the interest would otherwise be deductible. Forms to file 2012 taxes See section 267 of the Internal Revenue Code for more information. Forms to file 2012 taxes Below-Market Loans If you receive a below-market gift or demand loan and use the proceeds in your trade or business, you may be able to deduct the forgone interest. Forms to file 2012 taxes See Treatment of gift and demand loans, later, in this discussion. Forms to file 2012 taxes A below-market loan is a loan on which no interest is charged or on which interest is charged at a rate below the applicable federal rate. Forms to file 2012 taxes A gift or demand loan that is a below-market loan generally is considered an arm's-length transaction in which you, the borrower, are considered as having received both the following. Forms to file 2012 taxes A loan in exchange for a note that requires the payment of interest at the applicable federal rate. Forms to file 2012 taxes An additional payment in an amount equal to the forgone interest. Forms to file 2012 taxes The additional payment is treated as a gift, dividend, contribution to capital, payment of compensation, or other payment, depending on the substance of the transaction. Forms to file 2012 taxes Forgone interest. Forms to file 2012 taxes   For any period, forgone interest is The interest that would be payable for that period if interest accrued on the loan at the applicable federal rate and was payable annually on December 31, minus Any interest actually payable on the loan for the period. Forms to file 2012 taxes Applicable federal rates are published by the IRS each month in the Internal Revenue Bulletin. Forms to file 2012 taxes Internal Revenue Bulletins are available on the IRS web site at www. Forms to file 2012 taxes irs. Forms to file 2012 taxes gov/irb. Forms to file 2012 taxes You can also contact an IRS office to get these rates. Forms to file 2012 taxes Loans subject to the rules. Forms to file 2012 taxes   The rules for below-market loans apply to the following. Forms to file 2012 taxes Gift loans (below-market loans where the forgone interest is in the nature of a gift). Forms to file 2012 taxes Compensation-related loans (below-market loans between an employer and an employee or between an independent contractor and a person for whom the contractor provides services). Forms to file 2012 taxes Corporation-shareholder loans. Forms to file 2012 taxes Tax avoidance loans (below-market loans where the avoidance of federal tax is one of the main purposes of the interest arrangement). Forms to file 2012 taxes Loans to qualified continuing care facilities under a continuing care contract (made after October 11, 1985). Forms to file 2012 taxes   Except as noted in (5) above, these rules apply to demand loans (loans payable in full at any time upon the lender's demand) outstanding after June 6, 1984, and to term loans (loans that are not demand loans) made after that date. Forms to file 2012 taxes Treatment of gift and demand loans. Forms to file 2012 taxes   If you receive a below-market gift loan or demand loan, you are treated as receiving an additional payment (as a gift, dividend, etc. Forms to file 2012 taxes ) equal to the forgone interest on the loan. Forms to file 2012 taxes You are then treated as transferring this amount back to the lender as interest. Forms to file 2012 taxes These transfers are considered to occur annually, generally on December 31. Forms to file 2012 taxes If you use the loan proceeds in your trade or business, you can deduct the forgone interest each year as a business interest expense. Forms to file 2012 taxes The lender must report it as interest income. Forms to file 2012 taxes Limit on forgone interest for gift loans of $100,000 or less. Forms to file 2012 taxes   For gift loans between individuals, forgone interest treated as transferred back to the lender is limited to the borrower's net investment income for the year. Forms to file 2012 taxes This limit applies if the outstanding loans between the lender and borrower total $100,000 or less. Forms to file 2012 taxes If the borrower's net investment income is $1,000 or less, it is treated as zero. Forms to file 2012 taxes This limit does not apply to a loan if the avoidance of any federal tax is one of the main purposes of the interest arrangement. Forms to file 2012 taxes Treatment of term loans. Forms to file 2012 taxes   If you receive a below-market term loan other than a gift or demand loan, you are treated as receiving an additional cash payment (as a dividend, etc. Forms to file 2012 taxes ) on the date the loan is made. Forms to file 2012 taxes This payment is equal to the loan amount minus the present value, at the applicable federal rate, of all payments due under the loan. Forms to file 2012 taxes The same amount is treated as original issue discount on the loan. Forms to file 2012 taxes See Original issue discount (OID) under Interest You Can Deduct, earlier. Forms to file 2012 taxes Exceptions for loans of $10,000 or less. Forms to file 2012 taxes   The rules for below-market loans do not apply to any day on which the total outstanding loans between the borrower and lender is $10,000 or less. Forms to file 2012 taxes This exception applies only to the following. Forms to file 2012 taxes Gift loans between individuals if the loan is not directly used to buy or carry income-producing assets. Forms to file 2012 taxes Compensation-related loans or corporation-shareholder loans if the avoidance of any federal tax is not a principal purpose of the interest arrangement. Forms to file 2012 taxes This exception does not apply to a term loan described in (2) above that was previously subject to the below-market loan rules. Forms to file 2012 taxes Those rules will continue to apply even if the outstanding balance is reduced to $10,000 or less. Forms to file 2012 taxes Exceptions for loans without significant tax effect. Forms to file 2012 taxes   The following loans are specifically exempted from the rules for below-market loans because their interest arrangements do not have a significant effect on the federal tax liability of the borrower or the lender. Forms to file 2012 taxes Loans made available by lenders to the general public on the same terms and conditions that are consistent with the lender's customary business practices. Forms to file 2012 taxes Loans subsidized by a federal, state, or municipal government that are made available under a program of general application to the public. Forms to file 2012 taxes Certain employee-relocation loans. Forms to file 2012 taxes Certain loans to or from a foreign person, unless the interest income would be effectively connected with the conduct of a U. Forms to file 2012 taxes S. Forms to file 2012 taxes trade or business and not exempt from U. Forms to file 2012 taxes S. Forms to file 2012 taxes tax under an income tax treaty. Forms to file 2012 taxes Any other loan if the taxpayer can show that the interest arrangement has no significant effect on the federal tax liability of the lender or the borrower. Forms to file 2012 taxes Whether an interest arrangement has a significant effect on the federal tax liability of the lender or the borrower will be determined by all the facts and circumstances. Forms to file 2012 taxes Consider all the following factors. Forms to file 2012 taxes Whether items of income and deduction generated by the loan offset each other. Forms to file 2012 taxes The amount of the items. Forms to file 2012 taxes The cost of complying with the below-market loan provisions if they were to apply. Forms to file 2012 taxes Any reasons, other than taxes, for structuring the transaction as a below-market loan. Forms to file 2012 taxes Exception for loans to qualified continuing care facilities. Forms to file 2012 taxes   The below-market interest rules do not apply to a loan owed by a qualified continuing care facility under a continuing care contract if the lender or lender's spouse is age 62 or older by the end of the calendar year. Forms to file 2012 taxes A qualified continuing care facility is one or more facilities (excluding nursing homes) meeting the requirements listed below. Forms to file 2012 taxes Designed to provide services under continuing care contracts (defined below). Forms to file 2012 taxes Includes an independent living unit, and either an assisted living or nursing facility, or both. Forms to file 2012 taxes Substantially all of the independent living unit residents are covered by continuing care contracts. Forms to file 2012 taxes A continuing care contract is a written contract between an individual and a qualified continuing care facility that includes all of the following conditions. Forms to file 2012 taxes The individual or individual's spouse must be entitled to use the facility for the rest of their life or lives. Forms to file 2012 taxes The individual or individual's spouse will be provided with housing, as appropriate for the health of the individual or individual's spouse in an: independent living unit (which has additional available facilities outside the unit for the provision of meals and other personal care), and assisted living or nursing facility available in the continuing care facility. Forms to file 2012 taxes The individual or individual's spouse will be provided with assisted living or nursing care available in the continuing care facility, as required for the health of the individual or the individual's spouse. Forms to file 2012 taxes For more information, see section 7872(h) of the Internal Revenue Code. Forms to file 2012 taxes Sale or exchange of property. Forms to file 2012 taxes   Different rules generally apply to a loan connected with the sale or exchange of property. Forms to file 2012 taxes If the loan does not provide adequate stated interest, part of the principal payment may be considered interest. Forms to file 2012 taxes However, there are exceptions that may require you to apply the below-market interest rate rules to these loans. Forms to file 2012 taxes See Unstated Interest and Original Issue Discount (OID) in Publication 537. Forms to file 2012 taxes More information. Forms to file 2012 taxes   For more information on below-market loans, see section 7872 of the Internal Revenue Code and section 1. Forms to file 2012 taxes 7872-5 of the regulations. Forms to file 2012 taxes Prev  Up  Next   Home   More Online Publications