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Free online tax filing for 2011 Publication 1212 - Main Content Table of Contents Definitions Debt Instruments on the OID List Debt Instruments Not on the OID List Information for Brokers and Other MiddlemenShort-Term Obligations Redeemed at Maturity Long-Term Debt Instruments Certificates of Deposit Bearer Bonds and Coupons Backup Withholding Information for Owners of OID Debt InstrumentsExceptions. Free online tax filing for 2011 Adjustment for premium. Free online tax filing for 2011 Adjustment for acquisition premium. Free online tax filing for 2011 Adjustment for market discount. Free online tax filing for 2011 Form 1099-OID How To Report OID Figuring OID on Long-Term Debt Instruments Figuring OID on Stripped Bonds and Coupons How To Get Tax HelpLow Income Taxpayer Clinics Definitions The following terms are used throughout this publication. Free online tax filing for 2011 “Original issue discount” is defined first. Free online tax filing for 2011 The other terms are listed alphabetically. Free online tax filing for 2011 Original issue discount (OID). Free online tax filing for 2011   OID is a form of interest. Free online tax filing for 2011 It is the excess of a debt instrument's stated redemption price at maturity over its issue price (acquisition price for a stripped bond or coupon). Free online tax filing for 2011 Zero coupon bonds and debt instruments that pay no stated interest until maturity are examples of debt instruments that have OID. Free online tax filing for 2011 Accrual period. Free online tax filing for 2011   An accrual period is an interval of time used to measure OID. Free online tax filing for 2011 The length of an accrual period can be 6 months, a year, or some other period, depending on when the debt instrument was issued. Free online tax filing for 2011 Acquisition premium. Free online tax filing for 2011   Acquisition premium is the excess of a debt instrument's adjusted basis immediately after purchase, including purchase at original issue, over the debt instrument's adjusted issue price at that time. Free online tax filing for 2011 A debt instrument does not have acquisition premium, however, if the debt instrument was purchased at a premium. Free online tax filing for 2011 See Premium, later. Free online tax filing for 2011 Adjusted issue price. Free online tax filing for 2011   The adjusted issue price of a debt instrument at the beginning of an accrual period is used to figure the OID allocable to that period. Free online tax filing for 2011 In general, the adjusted issue price at the beginning of the debt instrument's first accrual period is its issue price. Free online tax filing for 2011 The adjusted issue price at the beginning of any subsequent accrual period is the sum of the issue price and all the OID includible in income before that accrual period minus any payment previously made on the debt instrument, other than a payment of qualified stated interest. Free online tax filing for 2011 Debt instrument. Free online tax filing for 2011   The term “debt instrument” means any instrument or contractual arrangement that constitutes indebtedness under general principles of federal income tax law (including, for example, a bond, debenture, note, certificate, or other evidence of indebtedness). Free online tax filing for 2011 It generally does not include an annuity contract. Free online tax filing for 2011 Issue price. Free online tax filing for 2011   For debt instruments listed in Section I-A and Section I-B, the issue price generally is the initial offering price to the public (excluding bond houses and brokers) at which a substantial amount of these instruments was sold. Free online tax filing for 2011 Market discount. Free online tax filing for 2011   Market discount arises when a debt instrument purchased in the secondary market has decreased in value since its issue date, generally because of an increase in interest rates. Free online tax filing for 2011 An OID debt instrument has market discount if your adjusted basis in the debt instrument immediately after you acquired it (usually its purchase price) was less than the debt instrument's issue price plus the total OID that accrued before you acquired it. Free online tax filing for 2011 The market discount is the difference between the issue price plus accrued OID and your adjusted basis. Free online tax filing for 2011 Premium. Free online tax filing for 2011   A debt instrument is purchased at a premium if its adjusted basis immediately after purchase is greater than the total of all amounts payable on the debt instrument after the purchase date, other than qualified stated interest. Free online tax filing for 2011 The premium is the excess of the adjusted basis over the payable amounts. Free online tax filing for 2011 See Publication 550 for information on the tax treatment of bond premium. Free online tax filing for 2011 Qualified stated interest. Free online tax filing for 2011   In general, qualified stated interest is stated interest that is unconditionally payable in cash or property (other than debt instruments of the issuer) at least annually over the term of the debt instrument at a single fixed rate. Free online tax filing for 2011 Stated redemption price at maturity. Free online tax filing for 2011   A debt instrument's stated redemption price at maturity is the sum of all amounts (principal and interest) payable on the debt instrument other than qualified stated interest. Free online tax filing for 2011 Yield to maturity (YTM). Free online tax filing for 2011   In general, the YTM is the discount rate that, when used in figuring the present value of all principal and interest payments, produces an amount equal to the issue price of the debt instrument. Free online tax filing for 2011 The YTM is generally shown on the face of the debt instrument or in the literature you receive from your broker. Free online tax filing for 2011 If you do not have this information, consult your broker, tax advisor, or the issuer. Free online tax filing for 2011 Debt Instruments on the OID List The OID list on the IRS website can be used by brokers and other middlemen to prepare information returns. Free online tax filing for 2011 If you own a listed debt instrument, you generally should not rely on the information in the OID list to determine (or compare) the OID to be reported on your tax return. Free online tax filing for 2011 The OID amounts listed are figured without reference to the price or date at which you acquired the debt instrument. Free online tax filing for 2011 For information about determining the OID to be reported on your tax return, see the instructions for figuring OID under Information for Owners of OID Debt Instruments, later. Free online tax filing for 2011 The following discussions explain what information is contained in each section of the list. Free online tax filing for 2011 Section I. Free online tax filing for 2011   This section contains publicly offered, long-term debt instruments. Free online tax filing for 2011 Section I-A: Corporate Debt Instruments Issued Before 1985. Free online tax filing for 2011 Section I-B: Corporate Debt Instruments Issued After 1984. Free online tax filing for 2011 Section I-C: Inflation-Indexed Debt Instruments. Free online tax filing for 2011 For each publicly offered debt instrument in Section I, the list contains the following information. Free online tax filing for 2011 The name of the issuer. Free online tax filing for 2011 The Committee on Uniform Security Identification Procedures (CUSIP) number. Free online tax filing for 2011 The issue date. Free online tax filing for 2011 The maturity date. Free online tax filing for 2011 The issue price expressed as a percent of principal or of stated redemption price at maturity. Free online tax filing for 2011 The annual stated or coupon interest rate. Free online tax filing for 2011 (This rate is shown as 0. Free online tax filing for 2011 00 if no annual interest payments are provided. Free online tax filing for 2011 ) The yield to maturity will be added to Section I-B for bonds issued after December 31, 2006. Free online tax filing for 2011 The total OID accrued up to January 1 of a calendar year. Free online tax filing for 2011 (This information is not available for every instrument. Free online tax filing for 2011 ) For long-term debt instruments issued after July 1, 1982, the daily OID for the accrual periods falling in a calendar year and a subsequent year. Free online tax filing for 2011 The total OID per $1,000 of principal or maturity value for a calendar year and a subsequent year. Free online tax filing for 2011 Section II. Free online tax filing for 2011   This section contains stripped coupons and principal components of U. Free online tax filing for 2011 S. Free online tax filing for 2011 Treasury and Government-Sponsored Enterprise debt instruments. Free online tax filing for 2011 These stripped components are available through the Department of the Treasury's Separate Trading of Registered Interest and Principal of Securities (STRIPS) program and government-sponsored enterprises such as the Resolution Funding Corporation. Free online tax filing for 2011 This section also includes debt instruments backed by U. Free online tax filing for 2011 S. Free online tax filing for 2011 Treasury securities that represent ownership interests in those securities. Free online tax filing for 2011   The obligations listed in Section II are arranged by maturity date. Free online tax filing for 2011 The amounts listed are the total OID for a calendar year per $1,000 of redemption price. Free online tax filing for 2011 Section III. Free online tax filing for 2011   This section contains short-term discount obligations. Free online tax filing for 2011 Section III-A: Short-Term U. Free online tax filing for 2011 S. Free online tax filing for 2011 Treasury Bills. Free online tax filing for 2011 Section III-B: Federal Home Loan Banks. Free online tax filing for 2011 Section III-C: Federal National Mortgage Association. Free online tax filing for 2011 Section III-D: Federal Farm Credit Banks. Free online tax filing for 2011 Section III-E: Federal Home Loan Mortgage Corporation. Free online tax filing for 2011 Section III-F: Federal Agricultural Mortgage Corporation. Free online tax filing for 2011    Information that supplements Section III-A is available on the Internet at http://www. Free online tax filing for 2011 treasurydirect. Free online tax filing for 2011 gov/tdhome. Free online tax filing for 2011 htm. Free online tax filing for 2011   The short-term obligations listed in this section are arranged by maturity date. Free online tax filing for 2011 For each obligation, the list contains the CUSIP number, maturity date, issue date, issue price (expressed as a percent of principal), and discount to be reported as interest for a calendar year per $1,000 of redemption price. Free online tax filing for 2011 Brokers and other middlemen should rely on the issue price information in Section III only if they are unable to determine the price actually paid by the owner. Free online tax filing for 2011 Debt Instruments Not on the OID List The list of debt instruments discussed earlier does not contain the following items. Free online tax filing for 2011 U. Free online tax filing for 2011 S. Free online tax filing for 2011 savings bonds. Free online tax filing for 2011 Certificates of deposit and other face-amount certificates issued at a discount, including syndicated certificates of deposit. Free online tax filing for 2011 Obligations issued by tax-exempt organizations. Free online tax filing for 2011 OID debt instruments that matured or were entirely called by the issuer before the tables were posted on the IRS website. Free online tax filing for 2011 Mortgage-backed securities and mortgage participation certificates. Free online tax filing for 2011 Long-term OID debt instruments issued before May 28, 1969. Free online tax filing for 2011 Short-term obligations, other than the obligations listed in Section III. Free online tax filing for 2011 Debt instruments issued at a discount by states or their political subdivisions. Free online tax filing for 2011 REMIC regular interests and CDOs. Free online tax filing for 2011 Commercial paper and banker's acceptances issued at a discount. Free online tax filing for 2011 Obligations issued at a discount by individuals. Free online tax filing for 2011 Foreign obligations not traded in the United States and obligations not issued in the United States. Free online tax filing for 2011 Information for Brokers and Other Middlemen The following discussions contain specific instructions for brokers and middlemen who hold or redeem a debt instrument for the owner. Free online tax filing for 2011 In general, you must file a Form 1099 for the debt instrument if the interest or OID to be included in the owner's income for a calendar year totals $10 or more. Free online tax filing for 2011 You also must file a Form 1099 if you were required to deduct and withhold tax, even if the interest or OID is less than $10. Free online tax filing for 2011 See Backup Withholding, later. Free online tax filing for 2011 If you must file a Form 1099, furnish a copy to the owner of the debt instrument by January 31 in the year it is due. Free online tax filing for 2011 File all your Forms 1099 with the IRS, accompanied by Form 1096, by February 28 in the year it is due (March 31 if you file electronically). Free online tax filing for 2011 Electronic payee statements. Free online tax filing for 2011   You can issue Form 1099-OID electronically with the consent of the recipient. Free online tax filing for 2011 More information. Free online tax filing for 2011   For more information, including penalties for failure to file (or furnish) required information returns or statements, see the General Instructions for Certain Information Returns (Forms 1098, 1099, 3921, 3922, 5498, and W-2G) for the appropriate calendar year. Free online tax filing for 2011 Short-Term Obligations Redeemed at Maturity If you redeem a short-term discount obligation for the owner at maturity, you must report the discount as interest on Form 1099-INT. Free online tax filing for 2011 To figure the discount, use the purchase price shown on the owner's copy of the purchase confirmation receipt or similar record, or the price shown in your transaction records. Free online tax filing for 2011 If you sell the obligation for the owner before maturity, you must file Form 1099-B to reflect the gross proceeds to the seller. Free online tax filing for 2011 Do not report the accrued discount to the date of sale on either Form 1099-INT or Form 1099-OID. Free online tax filing for 2011 If the owner's purchase price cannot be determined, figure the discount as if the owner had purchased the obligation at its original issue price. Free online tax filing for 2011 A special rule is used to determine the original issue price for information reporting on U. Free online tax filing for 2011 S. Free online tax filing for 2011 Treasury bills (T-bills) listed in Section III-A. Free online tax filing for 2011 Under this rule, you treat as the original issue price of the T-bill the noncompetitive (weighted average of accepted auction bids) discount price for the longest-maturity T-bill maturing on the same date as the T-bill being redeemed. Free online tax filing for 2011 This noncompetitive discount price is the issue price (expressed as a percent of principal) shown in Section III-A. Free online tax filing for 2011 A similar rule is used to figure the discount on short-term discount obligations issued by the organizations listed in Section III-B through Section III-F. Free online tax filing for 2011 Example 1. Free online tax filing for 2011 There are 13-week and 26-week T-bills maturing on the same date as the T-bill being redeemed. Free online tax filing for 2011 The price actually paid by the owner cannot be established by owner or middleman records. Free online tax filing for 2011 You treat as the issue price of the T-bill the noncompetitive discount price (expressed as a percent of principal) shown in Section III-A for a 26-week bill maturing on the same date as the T-bill redeemed. Free online tax filing for 2011 The interest you report on Form 1099-INT is the OID (per $1,000 of principal) shown in Section III-A for that obligation. Free online tax filing for 2011 Long-Term Debt Instruments If you hold a long-term OID debt instrument as a nominee for the true owner, you generally must file Form 1099-OID. Free online tax filing for 2011 For this purpose, you can rely on Section I of the OID list to determine the following information. Free online tax filing for 2011 Whether a debt instrument has OID. Free online tax filing for 2011 The OID to be reported on the Form 1099-OID. Free online tax filing for 2011 In general, you must report OID on publicly offered, long-term debt instruments listed in Section I. Free online tax filing for 2011 You also can report OID on other long-term debt instruments. Free online tax filing for 2011 Form 1099-OID. Free online tax filing for 2011   On Form 1099-OID for a calendar year show the following information. Free online tax filing for 2011 Box 1. Free online tax filing for 2011 The OID for the actual dates the owner held the debt instruments during a calendar year. Free online tax filing for 2011 To determine this amount, see Figuring OID, next. Free online tax filing for 2011 Box 2. Free online tax filing for 2011 The qualified stated interest paid or credited during the calendar year. Free online tax filing for 2011 Interest reported here is not reported on Form 1099-INT. Free online tax filing for 2011 The qualified stated interest on Treasury inflation-protected securities may be reported on Form 1099-INT in box 3 instead. Free online tax filing for 2011 Box 3. Free online tax filing for 2011 Any interest or principal forfeited because of an early withdrawal that the owner can deduct from gross income. Free online tax filing for 2011 Do not reduce the amounts in boxes 1 and 2 by the forfeiture. Free online tax filing for 2011 Box 4. Free online tax filing for 2011 Any backup withholding for this debt instrument. Free online tax filing for 2011 Box 7. Free online tax filing for 2011 The CUSIP number, if any. Free online tax filing for 2011 If there is no CUSIP number, give a description of the debt instrument, including the abbreviation for the stock exchange, the abbreviation used by the stock exchange for the issuer, the coupon rate, and the year of maturity (for example, NYSE XYZ 12. Free online tax filing for 2011 50 2006). Free online tax filing for 2011 If the issuer of the debt instrument is other than the payer, show the name of the issuer in this box. Free online tax filing for 2011 Box 8. Free online tax filing for 2011 The OID on a U. Free online tax filing for 2011 S. Free online tax filing for 2011 Treasury obligation for the part of the year the owner held the debt instrument. Free online tax filing for 2011 Box 9. Free online tax filing for 2011 Investment expenses passed on to holders of a single-class REMIC. Free online tax filing for 2011 Boxes 10-12. Free online tax filing for 2011 Use to report any state income tax withheld for this debt instrument. Free online tax filing for 2011 Figuring OID. Free online tax filing for 2011   You can determine the OID on a long-term debt instrument by using either of the following. Free online tax filing for 2011 Section I of the OID list. Free online tax filing for 2011 The income tax regulations. Free online tax filing for 2011 Using Section I. Free online tax filing for 2011   If the owner held the debt instrument for the entire calendar year, report the OID shown in Section I for the calendar year. Free online tax filing for 2011 Because OID is listed for each $1,000 of stated redemption price at maturity, you must adjust the listed amount to reflect the debt instrument's actual stated redemption price at maturity. Free online tax filing for 2011 For example, if the debt instrument's stated redemption price at maturity is $500, report one-half the listed OID. Free online tax filing for 2011   If the owner held the debt instrument for less than the entire calendar year, figure the OID to report as follows. Free online tax filing for 2011 Look up the daily OID for the first accrual period in the calendar year during which the owner held the debt instrument. Free online tax filing for 2011 Multiply the daily OID by the number of days the owner held the debt instrument during that accrual period. Free online tax filing for 2011 Repeat steps (1) and (2) for any remaining accrual periods for the year during which the owner held the debt instrument. Free online tax filing for 2011 Add the results in steps (2) and (3) to determine the owner's OID per $1,000 of stated redemption price at maturity. Free online tax filing for 2011 If necessary, adjust the OID in (4) to reflect the debt instrument's stated redemption price at maturity. Free online tax filing for 2011 Report the result on Form 1099-OID in box 1. Free online tax filing for 2011 Using the income tax regulations. Free online tax filing for 2011   Instead of using Section I to figure OID, you can use the regulations under sections 1272 through 1275 of the Internal Revenue Code. Free online tax filing for 2011 For example, under the regulations, you can use monthly accrual periods in figuring OID for a debt instrument issued after April 3, 1994, that provides for monthly payments. Free online tax filing for 2011 (If you use Section I-B, the OID is figured using 6-month accrual periods. Free online tax filing for 2011 )   For a general explanation of the rules for figuring OID under the regulations, see Figuring OID on Long-Term Debt Instruments under Information for Owners of OID Debt Instruments, later. Free online tax filing for 2011 Certificates of Deposit If you hold a bank certificate of deposit (CD) as a nominee, you must determine whether the CD has OID and any OID includible in the income of the owner. Free online tax filing for 2011 You must file an information return showing the reportable interest and OID, if any, on the CD. Free online tax filing for 2011 These rules apply whether or not you sold the CD to the owner. Free online tax filing for 2011 Report OID on a CD in the same way as OID on other debt instruments. Free online tax filing for 2011 See Short-Term Obligations Redeemed at Maturity and Long-Term Debt Instruments, earlier. Free online tax filing for 2011 Bearer Bonds and Coupons If a coupon from a bearer bond is presented to you for collection before the bond matures, you generally must report the interest on Form 1099-INT. Free online tax filing for 2011 However, do not report the interest if either of the following apply. Free online tax filing for 2011 You hold the bond as a nominee for the true owner. Free online tax filing for 2011 The payee is a foreign person. Free online tax filing for 2011 See Payments to foreign person under Backup Withholding, later. Free online tax filing for 2011 Because you cannot assume the presenter of the coupon also owns the bond, you should not report OID on the bond on Form 1099-OID. Free online tax filing for 2011 The coupon may have been “stripped” (separated) from the bond and separately purchased. Free online tax filing for 2011 However, if a long-term bearer bond on the OID list is presented to you for redemption upon call or maturity, you should prepare a Form 1099-OID showing the OID for that calendar year, as well as any coupon interest payments collected at the time of redemption. Free online tax filing for 2011 Backup Withholding If you report OID on Form 1099-OID or interest on Form 1099-INT for a calendar year, you may be required to apply backup withholding to the reportable payment at a rate of 28%. Free online tax filing for 2011 The backup withholding is deducted at the time a cash payment is made. Free online tax filing for 2011 See Pub. Free online tax filing for 2011 1281, Backup Withholding for Missing and Incorrect Name/TIN(s), for more information. Free online tax filing for 2011 Backup withholding generally applies in the following situations. Free online tax filing for 2011 The payee does not give you a taxpayer identification number (TIN). Free online tax filing for 2011 The IRS notifies you that the payee gave an incorrect TIN. Free online tax filing for 2011 The IRS notifies you that the payee is subject to backup withholding due to payee underreporting. Free online tax filing for 2011 For debt instruments acquired after 1983: The payee does not certify, under penalties of perjury, that he or she is not subject to backup withholding under (3), or The payee does not certify, under penalties of perjury, that the TIN given is correct. Free online tax filing for 2011 However, for short-term discount obligations (other than government obligations), bearer bonds and coupons, and U. Free online tax filing for 2011 S. Free online tax filing for 2011 savings bonds, backup withholding applies only if the payee does not give you a TIN or gives you an obviously incorrect number for a TIN. Free online tax filing for 2011 Short-term obligations. Free online tax filing for 2011   Backup withholding applies to OID on a short-term obligation only when the OID is paid at maturity. Free online tax filing for 2011 However, backup withholding applies to any interest payable before maturity when the interest is paid or credited. Free online tax filing for 2011   If the owner of a short-term obligation at maturity is not the original owner and can establish the purchase price of the obligation, the amount subject to backup withholding must be determined by treating the purchase price as the issue price. Free online tax filing for 2011 However, you can choose to disregard that price if it would require significant manual intervention in the computer or recordkeeping system used for the obligation. Free online tax filing for 2011 If the purchase price of a listed obligation is not established or is disregarded, you must use the issue price shown in Section III. Free online tax filing for 2011 Long-term obligations. Free online tax filing for 2011   If no cash payments are made on a long-term obligation before maturity, backup withholding applies only at maturity. Free online tax filing for 2011 The amount subject to backup withholding is the OID includible in the owner's gross income for the calendar year when the obligation matures. Free online tax filing for 2011 The amount to be withheld is limited to the cash paid. Free online tax filing for 2011 Registered long-term obligations with cash payments. Free online tax filing for 2011   If a registered long-term obligation has cash payments before maturity, backup withholding applies when a cash payment is made. Free online tax filing for 2011 The amount subject to backup withholding is the total of the qualified stated interest (defined earlier under Definitions) and OID includible in the owner's gross income for the calendar year when the payment is made. Free online tax filing for 2011 If more than one cash payment is made during the year, the OID subject to withholding for the year must be allocated among the expected cash payments in the ratio that each bears to the total of the expected cash payments. Free online tax filing for 2011 For any payment, the required withholding is limited to the cash paid. Free online tax filing for 2011 Payee not the original owner. Free online tax filing for 2011   If the payee is not the original owner of the obligation, the OID subject to backup withholding is the OID includible in the gross income of all owners during the calendar year (without regard to any amount paid by the new owner at the time of transfer). Free online tax filing for 2011 The amount subject to backup withholding at maturity of a listed obligation must be determined using the issue price shown in Section I. Free online tax filing for 2011 Bearer long-term obligations with cash payments. Free online tax filing for 2011   If a bearer long-term obligation has cash payments before maturity, backup withholding applies when the cash payments are made. Free online tax filing for 2011 For payments before maturity, the amount subject to withholding is the qualified stated interest (defined earlier under Definitions) includible in the owner's gross income for the calendar year. Free online tax filing for 2011 For a payment at maturity, the amount subject to withholding is only the total of any qualified stated interest paid at maturity and the OID includible in the owner's gross income for the calendar year when the obligation matures. Free online tax filing for 2011 The required withholding at maturity is limited to the cash paid. Free online tax filing for 2011 Sales and redemptions. Free online tax filing for 2011   If you report the gross proceeds from a sale, exchange, or redemption of a debt instrument on Form 1099-B for a calendar year, you may be required to withhold 28% of the amount reported. Free online tax filing for 2011 Backup withholding applies in the following situations. Free online tax filing for 2011 The payee does not give you a TIN. Free online tax filing for 2011 The IRS notifies you that the payee gave an incorrect TIN. Free online tax filing for 2011 For debt instruments held in an account opened after 1983, the payee does not certify, under penalties of perjury, that the TIN given is correct. Free online tax filing for 2011 Payments outside the United States to U. Free online tax filing for 2011 S. Free online tax filing for 2011 person. Free online tax filing for 2011   The requirements for backup withholding and information reporting apply to payments of OID and interest made outside the United States to a U. Free online tax filing for 2011 S. Free online tax filing for 2011 person, a controlled foreign corporation, or a foreign person at least 50% of whose income for the preceding 3-year period is effectively connected with the conduct of a U. Free online tax filing for 2011 S. Free online tax filing for 2011 trade or business. Free online tax filing for 2011 Payments to foreign person. Free online tax filing for 2011   The following discussions explain the rules for backup withholding and information reporting on payments to foreign persons. Free online tax filing for 2011 U. Free online tax filing for 2011 S. Free online tax filing for 2011 -source amount. Free online tax filing for 2011   Backup withholding and information reporting are not required for payments of U. Free online tax filing for 2011 S. Free online tax filing for 2011 -source OID, interest, or proceeds from a sale or redemption of an OID instrument if the payee has given you proof (generally the appropriate Form W-8 or an acceptable substitute) that the payee is a foreign person. Free online tax filing for 2011 A U. Free online tax filing for 2011 S. Free online tax filing for 2011 resident is not a foreign person. Free online tax filing for 2011 For proof of the payee's foreign status, you can rely on the appropriate Form W-8 or on documentary evidence for payments made outside the United States to an offshore account or, in case of broker proceeds, a sale effected outside the United States. Free online tax filing for 2011 Receipt of the appropriate Form W-8 does not relieve you from information reporting and backup withholding if you actually know the payee is a U. Free online tax filing for 2011 S. Free online tax filing for 2011 person. Free online tax filing for 2011   For information about the 28% withholding tax that may apply to payments of U. Free online tax filing for 2011 S. Free online tax filing for 2011 -source OID or interest to foreign persons, see Publication 515. Free online tax filing for 2011 Foreign-source amount. Free online tax filing for 2011   Backup withholding and information reporting are not required for payments of foreign-source OID and interest made outside the United States. Free online tax filing for 2011 However, if the payments are made inside the United States, the requirements for backup withholding and information reporting will apply unless the payee has given you the appropriate Form W-8 or acceptable substitute as proof that the payee is a foreign person. Free online tax filing for 2011 More information. Free online tax filing for 2011   For more information about backup withholding and information reporting on foreign-source amounts or payments to foreign persons, see Regulations section 1. Free online tax filing for 2011 6049-5. Free online tax filing for 2011 Information for Owners of OID Debt Instruments This section is for persons who prepare their own tax returns. Free online tax filing for 2011 It discusses the income tax rules for figuring and reporting OID on long-term debt instruments. Free online tax filing for 2011 It also includes a similar discussion for stripped bonds and coupons, such as zero coupon bonds available through the Department of the Treasury's STRIPS program and government-sponsored enterprises such as the Resolution Funding Corporation. Free online tax filing for 2011 However, the information provided does not cover every situation. Free online tax filing for 2011 More information can be found in the regulations under sections 1271 through 1275 of the Internal Revenue Code. Free online tax filing for 2011 Including OID in income. Free online tax filing for 2011   Generally, you include OID in income as it accrues each year, whether or not you receive any payments from the debt instrument issuer. Free online tax filing for 2011 Exceptions. Free online tax filing for 2011   The rules for including OID in income as it accrues generally do not apply to the following debt instruments. Free online tax filing for 2011 U. Free online tax filing for 2011 S. Free online tax filing for 2011 savings bonds. Free online tax filing for 2011 Tax-exempt obligations. Free online tax filing for 2011 (However, see Tax-Exempt Bonds and Coupons, later. Free online tax filing for 2011 ) Obligations issued by individuals before March 2, 1984. Free online tax filing for 2011 Loans of $10,000 or less between individuals who are not in the business of lending money. Free online tax filing for 2011 (The dollar limit includes outstanding prior loans by the lender to the borrower. Free online tax filing for 2011 ) This exception does not apply if a principal purpose of the loan is to avoid any federal tax. Free online tax filing for 2011   See chapter 1 of Publication 550 for information about the rules for these and other types of discounted debt instruments, such as short-term and market discount obligations. Free online tax filing for 2011 Publication 550 also discusses rules for holders of REMIC interests and CDOs. Free online tax filing for 2011 De minimis rule. Free online tax filing for 2011   You can treat OID as zero if the total OID on a debt instrument is less than one-fourth of 1% (. Free online tax filing for 2011 0025) of the stated redemption price at maturity multiplied by the number of full years from the date of original issue to maturity. Free online tax filing for 2011 Debt instruments with de minimis OID are not listed in this publication. Free online tax filing for 2011 There are special rules to determine the de minimis amount in the case of debt instruments that provide for more than one payment of principal. Free online tax filing for 2011 Also, the de minimis rules generally do not apply to tax-exempt obligations. Free online tax filing for 2011 Example 2. Free online tax filing for 2011 You bought at issuance a 10-year debt instrument with a stated redemption price at maturity of $1,000, issued at $980 with OID of $20. Free online tax filing for 2011 One-fourth of 1% of $1,000 (the stated redemption price) times 10 (the number of full years from the date of original issue to maturity) equals $25. Free online tax filing for 2011 Under the de minimis rule, you can treat the OID as zero because the $20 discount is less than $25. Free online tax filing for 2011 Example 3. Free online tax filing for 2011 Assume the same facts as Example 2, except the debt instrument was issued at $950. Free online tax filing for 2011 You must report part of the $50 OID each year because it is more than $25. Free online tax filing for 2011 Choice to report all interest as OID. Free online tax filing for 2011   Generally, you can choose to treat all interest on a debt instrument acquired after April 3, 1994, as OID and include it in gross income by using the constant yield method. Free online tax filing for 2011 See Constant yield method under Debt Instruments Issued After 1984, later, for more information. Free online tax filing for 2011   For this choice, interest includes stated interest, acquisition discount, OID, de minimis OID, market discount, de minimis market discount, and unstated interest, as adjusted by any amortizable bond premium or acquisition premium. Free online tax filing for 2011 For more information, see Regulations section 1. Free online tax filing for 2011 1272-3. Free online tax filing for 2011 Purchase after date of original issue. Free online tax filing for 2011   A debt instrument you purchased after the date of original issue may have premium, acquisition premium, or market discount. Free online tax filing for 2011 If so, the OID reported to you on Form 1099-OID may have to be adjusted. Free online tax filing for 2011 For more information, see Showing an OID adjustment under How To Report OID, later. Free online tax filing for 2011 The following rules generally do not apply to contingent payment debt instruments. Free online tax filing for 2011 Adjustment for premium. Free online tax filing for 2011   If your debt instrument (other than an inflation-indexed debt instrument) has premium, do not report any OID as ordinary income. Free online tax filing for 2011 Your adjustment is the total OID shown on your Form 1099-OID. Free online tax filing for 2011 Adjustment for acquisition premium. Free online tax filing for 2011   If your debt instrument has acquisition premium, reduce the OID you report. Free online tax filing for 2011 Your adjustment is the difference between the OID shown on your Form 1099-OID and the reduced OID amount figured using the rules explained later under Figuring OID on Long-Term Debt Instruments. Free online tax filing for 2011 Adjustment for market discount. Free online tax filing for 2011   If your debt instrument has market discount that you choose to include in income currently, increase the OID you report. Free online tax filing for 2011 Your adjustment is the accrued market discount for the year. Free online tax filing for 2011 See Market Discount Bonds in chapter 1 of Publication 550 for information on how to figure accrued market discount and include it in your income currently and for other information about market discount bonds. Free online tax filing for 2011 If you choose to use the constant yield method to figure accrued market discount, also see Figuring OID on Long-Term Debt Instruments, later. Free online tax filing for 2011 The constant yield method of figuring accrued OID, explained in those discussions under Constant yield method, is also used to figure accrued market discount. Free online tax filing for 2011 For more information concerning premium or market discount on an inflation-indexed debt instrument, see Regulations section 1. Free online tax filing for 2011 1275-7. Free online tax filing for 2011 Sale, exchange, or redemption. Free online tax filing for 2011   Generally, you treat your gain or loss from the sale, exchange, or redemption of a discounted debt instrument as a capital gain or loss if you held the debt instrument as a capital asset. Free online tax filing for 2011 If you sold the debt instrument through a broker, you should receive Form 1099-B or an equivalent statement from the broker. Free online tax filing for 2011 Use the Form 1099-B or other statement and your brokerage statements to complete Form 8949, and Schedule D (Form 1040). Free online tax filing for 2011   Your gain or loss is the difference between the amount you realized on the sale, exchange, or redemption and your basis in the debt instrument. Free online tax filing for 2011 Your basis, generally, is your cost increased by the OID you have included in income each year you held it. Free online tax filing for 2011 In general, to determine your gain or loss on a tax-exempt bond, figure your basis in the bond by adding to your cost the OID you would have included in income if the bond had been taxable. Free online tax filing for 2011   See chapter 4 of Publication 550 for more information about the tax treatment of the sale or redemption of discounted debt instruments. Free online tax filing for 2011 Example 4. Free online tax filing for 2011 Larry, a calendar year taxpayer, bought a corporate debt instrument at original issue for $86,235. Free online tax filing for 2011 00 on November 1 of Year 1. Free online tax filing for 2011 The 15-year debt instrument matures on October 31 of Year 16 at a stated redemption price of $100,000. Free online tax filing for 2011 The debt instrument provides for semiannual payments of interest at 10%. Free online tax filing for 2011 Assume the debt instrument is a capital asset in Larry's hands. Free online tax filing for 2011 The debt instrument has $13,765. Free online tax filing for 2011 00 of OID ($100,000 stated redemption price at maturity minus $86,235. Free online tax filing for 2011 00 issue price). Free online tax filing for 2011 Larry sold the debt instrument for $90,000 on November 1 of Year 4. Free online tax filing for 2011 Including the OID he will report for the period he held the debt instrument in Year 4, Larry has included $4,556. Free online tax filing for 2011 00 of OID in income and has increased his basis by that amount to $90,791. Free online tax filing for 2011 00. Free online tax filing for 2011 Larry has realized a loss of $791. Free online tax filing for 2011 00. Free online tax filing for 2011 All of Larry's loss is capital loss. Free online tax filing for 2011 Form 1099-OID The issuer of the debt instrument (or your broker, if you purchased or held the debt instrument through a broker) should give you a copy of Form 1099-OID or a similar statement if the accrued OID for the calendar year is $10 or more and the term of the debt instrument is more than 1 year. Free online tax filing for 2011 Form 1099-OID shows all OID income in box 1 except OID on a U. Free online tax filing for 2011 S. Free online tax filing for 2011 Treasury obligation, which is shown in box 8. Free online tax filing for 2011 It also shows, in box 2, any qualified stated interest you must include in income. Free online tax filing for 2011 (However, any qualified stated interest on Treasury inflation-protected securities can be reported on Form 1099-INT in box 3. Free online tax filing for 2011 ) A copy of Form 1099-OID will be sent to the IRS. Free online tax filing for 2011 Do not attach your copy to your tax return. Free online tax filing for 2011 Keep it for your records. Free online tax filing for 2011 If you are required to file a tax return and you receive Form 1099-OID showing taxable amounts, you must report these amounts on your return. Free online tax filing for 2011 A 20% accuracy-related penalty may be charged for underpayment of tax due to either negligence or disregard of rules and regulations or substantial understatement of tax. Free online tax filing for 2011 Form 1099-OID not received. Free online tax filing for 2011   If you held an OID debt instrument for a calendar year but did not receive a Form 1099-OID, refer to the discussions under Figuring OID on Long-Term Debt Instruments, later, for information on the OID you must report. Free online tax filing for 2011 Refiguring OID. Free online tax filing for 2011   You must refigure the OID shown on Form 1099-OID, in box 1 or box 8, to determine the proper amount to include in income if one of the following applies. Free online tax filing for 2011 You bought the debt instrument at a premium or at an acquisition premium. Free online tax filing for 2011 The debt instrument is a stripped bond or coupon (including zero coupon bonds backed by U. Free online tax filing for 2011 S. Free online tax filing for 2011 Treasury securities). Free online tax filing for 2011 The debt instrument is a contingent payment or inflation-indexed debt instrument. Free online tax filing for 2011 See the discussions under Figuring OID on Long-Term Debt Instruments or Figuring OID on Stripped Bonds and Coupons, later, for the specific computations. Free online tax filing for 2011 Refiguring interest. Free online tax filing for 2011   If you disposed of a debt instrument or acquired it from another holder between interest dates, see the discussion under Bonds Sold Between Interest Dates in chapter 1 of Publication 550 for information about refiguring the interest shown on Form 1099-OID in box 2. Free online tax filing for 2011 Nominee. Free online tax filing for 2011   If you are the holder of an OID debt instrument and you receive a Form 1099-OID that shows your taxpayer identification number and includes amounts belonging to another person, you are considered a “nominee. Free online tax filing for 2011 ” You must file another Form 1099-OID for each actual owner, showing the OID for the owner. Free online tax filing for 2011 Show the owner of the debt instrument as the “recipient” and you as the “payer. Free online tax filing for 2011 ”   Complete Form 1099-OID and Form 1096 and file the forms with the Internal Revenue Service Center for your area. Free online tax filing for 2011 You must also give a copy of the Form 1099-OID to the actual owner. Free online tax filing for 2011 However, you are not required to file a nominee return to show amounts belonging to your spouse. Free online tax filing for 2011 See the Form 1099 instructions for more information. Free online tax filing for 2011   When preparing your tax return, follow the instructions under Showing an OID adjustment in the next discussion. Free online tax filing for 2011 How To Report OID Generally, you report your taxable interest and OID income on the interest line of Form 1040EZ, Form 1040A, or Form 1040. Free online tax filing for 2011 Form 1040 or Form 1040A required. Free online tax filing for 2011   You must use Form 1040 or Form 1040A (you cannot use Form 1040EZ) under either of the following conditions. Free online tax filing for 2011 You received a Form 1099-OID as a nominee for the actual owner. Free online tax filing for 2011 Your total interest and OID income for the year was more than $1,500. Free online tax filing for 2011 Form 1040 required. Free online tax filing for 2011   You must use Form 1040 (you cannot use Form 1040A or Form 1040EZ) if you are reporting more or less OID than the amount shown on Form 1099-OID, other than because you are a nominee. Free online tax filing for 2011 For example, if you paid a premium or an acquisition premium when you purchased the debt instrument, you must use Form 1040 because you will report less OID than shown on Form 1099-OID. Free online tax filing for 2011 Also, you must use Form 1040 if you were charged an early withdrawal penalty. Free online tax filing for 2011 Where to report. Free online tax filing for 2011   List each payer's name (if a brokerage firm gave you a Form 1099, list the brokerage firm as the payer) and the amount received from each payer on Form 1040A, Schedule B, Part I, line 1, or Form 1040, Schedule B, line 1. Free online tax filing for 2011 Include all OID and periodic interest shown on any Form 1099-OID, boxes 1, 2, and 8, you received for the tax year. Free online tax filing for 2011 Also include any other OID and interest income for which you did not receive a Form 1099. Free online tax filing for 2011 Showing an OID adjustment. Free online tax filing for 2011   If you use Form 1040 to report more or less OID than shown on Form 1099-OID, list the full OID on Schedule B, Part I, line 1, and follow the instructions under 1 or 2, next. Free online tax filing for 2011   If you use Form 1040A to report the OID shown on a Form 1099-OID you received as a nominee for the actual owner, list the full OID on Schedule B, Part I, line 1 and follow the instructions under 1. Free online tax filing for 2011 If the OID, as adjusted, is less than the amount shown on Form 1099-OID, show the adjustment as follows. Free online tax filing for 2011 Under your last entry on line 1, subtotal all interest and OID income listed on line 1. Free online tax filing for 2011 Below the subtotal, write “Nominee Distribution” or “OID Adjustment” and show the OID you are not required to report. Free online tax filing for 2011 Subtract that OID from the subtotal and enter the result on line 2. Free online tax filing for 2011 If the OID, as adjusted, is more than the amount shown on Form 1099-OID, show the adjustment as follows. Free online tax filing for 2011 Under your last entry on line 1, subtotal all interest and OID income listed on line 1. Free online tax filing for 2011 Below the subtotal, write “OID Adjustment” and show the additional OID. Free online tax filing for 2011 Add that OID to the subtotal and enter the result on line 2. Free online tax filing for 2011 Figuring OID on Long-Term Debt Instruments How you figure the OID on a long-term debt instrument depends on the date it was issued. Free online tax filing for 2011 It also may depend on the type of the debt instrument. Free online tax filing for 2011 There are different rules for each of the following debt instruments. Free online tax filing for 2011 Corporate debt instruments issued after 1954 and before May 28, 1969, and government debt instruments issued after 1954 and before July 2, 1982. Free online tax filing for 2011 Corporate debt instruments issued after May 27, 1969, and before July 2, 1982. Free online tax filing for 2011 Debt instruments issued after July 1, 1982, and before 1985. Free online tax filing for 2011 Debt instruments issued after 1984 (other than debt instruments described in (5) and (6)). Free online tax filing for 2011 Contingent payment debt instruments issued after August 12, 1996. Free online tax filing for 2011 Inflation-indexed debt instruments (including Treasury inflation-protected securities) issued after January 5, 1997. Free online tax filing for 2011 Zero coupon bonds. Free online tax filing for 2011   The rules for figuring OID on zero coupon bonds backed by U. Free online tax filing for 2011 S. Free online tax filing for 2011 Treasury securities are discussed under Figuring OID on Stripped Bonds and Coupons, later. Free online tax filing for 2011 Corporate Debt Instruments Issued After 1954 and Before May 28, 1969, and Government Debt Instruments Issued After 1954 and Before July 2, 1982 If you hold these debt instruments as capital assets, you include OID in income only in the year the debt instrument is sold, exchanged, or redeemed, and only if you have a gain. Free online tax filing for 2011 The OID, which is taxed as ordinary income, generally equals the following amount. Free online tax filing for 2011   number of full months you held the debt instrument  number of full months from date of original issue to date of maturity X original issue discount The balance of the gain is capital gain. Free online tax filing for 2011 If there is a loss on the sale of the debt instrument, the entire loss is a capital loss and no OID is reported. Free online tax filing for 2011 Corporate Debt Instruments Issued After May 27, 1969, and Before July 2, 1982 If you hold these debt instruments as capital assets, you must include part of the OID in income each year you own the debt instruments. Free online tax filing for 2011 For information about showing the correct OID on your tax return, see the discussion under How To Report OID, earlier. Free online tax filing for 2011 Your basis in the debt instrument is increased by the OID you include in income. Free online tax filing for 2011 Form 1099-OID. Free online tax filing for 2011   You should receive a Form 1099-OID showing OID for the part of the year you held the debt instrument. Free online tax filing for 2011 However, if you paid an acquisition premium, you may need to refigure the OID to report on your tax return. Free online tax filing for 2011 See Reduction for acquisition premium, later. Free online tax filing for 2011 If you held an OID debt instrument in a calendar year but did not receive a Form 1099-OID, see Form 1099-OID not received, immediately below, and refer to Section I-A available at www. Free online tax filing for 2011 irs. Free online tax filing for 2011 gov/pub1212 by clicking the link under Recent Developments. Free online tax filing for 2011 Form 1099-OID not received. Free online tax filing for 2011    The OID listed is for each $1,000 of redemption price. Free online tax filing for 2011 You must adjust the listed amount if your debt instrument has a different principal amount. Free online tax filing for 2011 For example, if you have a debt instrument with a $500 principal amount, use one-half the listed amount to figure your OID. Free online tax filing for 2011   If you held the debt instrument the entire year, use the OID shown in Section I-A for a calendar year. Free online tax filing for 2011 (If your debt instrument is not listed in Section I-A, consult the issuer for information about the issue price and the OID that accrued for that year. Free online tax filing for 2011 ) If you did not hold the debt instrument the entire year, figure your OID using the following method. Free online tax filing for 2011 Divide the OID shown by 12. Free online tax filing for 2011 Multiply the result in (1) by the number of complete and partial months (for example, 6½ months) you held the debt instrument during a calendar year. Free online tax filing for 2011 This is the OID to include in income unless you paid an acquisition premium. Free online tax filing for 2011 The reduction for acquisition premium is discussed next. Free online tax filing for 2011 Reduction for acquisition premium. Free online tax filing for 2011   If you bought the debt instrument at an acquisition premium, figure the OID to include in income as follows. Free online tax filing for 2011 Divide the total OID on the debt instrument by the number of complete months, and any part of a month, from the date of original issue to the maturity date. Free online tax filing for 2011 This is the monthly OID. Free online tax filing for 2011 Subtract from your cost the issue price and the accumulated OID from the date of issue to the date of purchase. Free online tax filing for 2011 (If the result is zero or less, stop here. Free online tax filing for 2011 You did not pay an acquisition premium. Free online tax filing for 2011 ) Divide the amount figured in (2) by the number of complete months, and any part of a month, from the date of your purchase to the maturity date. Free online tax filing for 2011 Subtract the amount figured in (3) from the amount figured in (1). Free online tax filing for 2011 This is the OID to include in income for each month you hold the debt instrument during the year. Free online tax filing for 2011 Transfers during the month. Free online tax filing for 2011   If you buy or sell a debt instrument on any day other than the same day of the month as the date of original issue, the ratable monthly portion of OID for the month of sale is divided between the seller and the buyer according to the number of days each held the debt instrument. Free online tax filing for 2011 Your holding period for this purpose begins the day you acquire the debt instrument and ends the day before you dispose of it. Free online tax filing for 2011 Debt Instruments Issued After July 1, 1982, and Before 1985 If you hold these debt instruments as capital assets, you must include part of the OID in income each year you own the debt instruments and increase your basis by the amount included. Free online tax filing for 2011 For information about showing the correct OID on your tax return, see How To Report OID, earlier. Free online tax filing for 2011 Form 1099-OID. Free online tax filing for 2011   You should receive a Form 1099-OID showing OID for the part of the year you held the debt instrument. Free online tax filing for 2011 However, if you paid an acquisition premium, you may need to refigure the OID to report on your tax return. Free online tax filing for 2011 See Constant yield method and the discussions on acquisition premium that follow, later. Free online tax filing for 2011 If you held an OID debt instrument in a calendar year but did not receive a Form 1099-OID, see Form 1099-OID not received, immediately below, and refer to Section I-A available at www. Free online tax filing for 2011 irs. Free online tax filing for 2011 gov/pub1212 by clicking the link under Recent Developments. Free online tax filing for 2011 Form 1099-OID not received. Free online tax filing for 2011    The OID listed is for each $1,000 of redemption price. Free online tax filing for 2011 You must adjust the listed amount if your debt instrument has a different principal amount. Free online tax filing for 2011 For example, if you have a debt instrument with a $500 principal amount, use one-half the listed amount to figure your OID. Free online tax filing for 2011   If you held the debt instrument the entire year, use the OID shown in Section I-A. Free online tax filing for 2011 (If your instrument is not listed in Section I-A, consult the issuer for information about the issue price, the yield to maturity, and the OID that accrued for that year. Free online tax filing for 2011 ) If you did not hold the debt instrument the entire year, figure your OID using either of the following methods. Free online tax filing for 2011 Method 1. Free online tax filing for 2011    Divide the total OID for a calendar year by 365 (366 for leap years). Free online tax filing for 2011 Multiply the result in (1) by the number of days you held the debt instrument during that particular year. Free online tax filing for 2011  This computation is an approximation and may result in a slightly higher OID than Method 2. Free online tax filing for 2011 Method 2. Free online tax filing for 2011    Look up the daily OID for the first accrual period you held the debt instrument during a calendar year. Free online tax filing for 2011 (See Accrual period under Constant yield method, next. Free online tax filing for 2011 ) Multiply the daily OID by the number of days you held the debt instrument during that accrual period. Free online tax filing for 2011 If you held the debt instrument for part of both accrual periods, repeat (1) and (2) for the second accrual period. Free online tax filing for 2011 Add the results of (2) and (3). Free online tax filing for 2011 This is the OID to include in income, unless you paid an acquisition premium. Free online tax filing for 2011 (The reduction for acquisition premium is discussed later. Free online tax filing for 2011 ) Constant yield method. Free online tax filing for 2011   This discussion shows how to figure OID on debt instruments issued after July 1, 1982, and before 1985, using a constant yield method. Free online tax filing for 2011 OID is allocated over the life of the debt instrument through adjustments to the issue price for each accrual period. Free online tax filing for 2011   Figure the OID allocable to any accrual period as follows. Free online tax filing for 2011 Multiply the adjusted issue price at the beginning of the accrual period by the debt instrument's yield to maturity. Free online tax filing for 2011 Subtract from the result in (1) any qualified stated interest allocable to the accrual period. Free online tax filing for 2011 Accrual period. Free online tax filing for 2011   An accrual period for any OID debt instrument issued after July 1, 1982, and before 1985 is each 1-year period beginning on the date of the issue of the obligation and each anniversary thereafter, or the shorter period to maturity for the last accrual period. Free online tax filing for 2011 Your tax year will usually include parts of two accrual periods. Free online tax filing for 2011 Daily OID. Free online tax filing for 2011   The OID for any accrual period is allocated equally to each day in the accrual period. Free online tax filing for 2011 You must include in income the sum of the OID amounts for each day you hold the debt instrument during the year. Free online tax filing for 2011 If your tax year includes parts of two or more accrual periods, you must include the proper daily OID amounts for each accrual period. Free online tax filing for 2011 Figuring daily OID. Free online tax filing for 2011   The daily OID for the initial accrual period is figured using the following formula. Free online tax filing for 2011   (ip × ytm) − qsi     p   ip = issue price ytm = yield to maturity qsi = qualified stated interest p = number of days in accrual period         The daily OID for subsequent accrual periods is figured the same way except the adjusted issue price at the beginning of each period is used in the formula instead of the issue price. Free online tax filing for 2011 Reduction for acquisition premium on debt instruments purchased before July 19, 1984. Free online tax filing for 2011   If you bought the debt instrument at an acquisition premium before July 19, 1984, figure the OID includible in income by reducing the daily OID by the daily acquisition premium. Free online tax filing for 2011 Figure the daily acquisition premium by dividing the total acquisition premium by the number of days in the period beginning on your purchase date and ending on the day before the date of maturity. Free online tax filing for 2011 Reduction for acquisition premium on debt instruments purchased after July 18, 1984. Free online tax filing for 2011   If you bought the debt instrument at an acquisition premium after July 18, 1984, figure the OID includible in income by reducing the daily OID by the daily acquisition premium. Free online tax filing for 2011 However, the method of figuring the daily acquisition premium is different from the method described in the preceding discussion. Free online tax filing for 2011 To figure the daily acquisition premium under this method, multiply the daily OID by the following fraction. Free online tax filing for 2011 The numerator is the acquisition premium. Free online tax filing for 2011 The denominator is the total OID remaining for the debt instrument after your purchase date. Free online tax filing for 2011 Section I-A is available at www. Free online tax filing for 2011 irs. Free online tax filing for 2011 gov/pub1212 and clicking the link under Recent Developments. Free online tax filing for 2011 Using Section I-A to figure accumulated OID. Free online tax filing for 2011   If you bought your corporate debt instrument in a calendar year or the subsequent year, you can figure the accumulated OID to the date of purchase by adding the following amounts. Free online tax filing for 2011 The amount from the “Total OID to January 1, YYYY” column for your debt instrument. Free online tax filing for 2011 The OID from January 1 of a calendar year to the date of purchase, figured as follows. Free online tax filing for 2011 Multiply the daily OID for the first accrual period in the calendar year by the number of days from January 1 to the date of purchase, or the end of the accrual period if the debt instrument was purchased in the second or third accrual period. Free online tax filing for 2011 Multiply the daily OID for each subsequent accrual period by the number of days in the period to the date of purchase or the end of the accrual period, whichever applies. Free online tax filing for 2011 Add the amounts figured in (2a) and (2b). Free online tax filing for 2011 Debt Instruments Issued After 1984 If you hold debt instruments issued after 1984, you must report part of the OID in gross income each year that you own the debt instruments. Free online tax filing for 2011 You must include the OID in gross income whether or not you hold the debt instrument as a capital asset. Free online tax filing for 2011 Your basis in the debt instrument is increased by the OID you include in income. Free online tax filing for 2011 For information about showing the correct OID on your tax return, see How To Report OID, earlier. Free online tax filing for 2011 Form 1099-OID. Free online tax filing for 2011   You should receive a Form 1099-OID showing OID for the part of a calendar year you held the debt instrument. Free online tax filing for 2011 However, if you paid an acquisition premium, you may need to refigure the OID to report on your tax return. Free online tax filing for 2011 See Constant yield method and Reduction for acquisition premium, later. Free online tax filing for 2011   You may also need to refigure the OID for a contingent payment or inflation-indexed debt instrument on which the amount reported on Form 1099-OID is inaccurate. Free online tax filing for 2011 See Contingent Payment Debt Instruments or Inflation-Indexed Debt Instruments, later. Free online tax filing for 2011 If you held an OID debt instrument in a calendar year but did not receive a Form 1099-OID, see Form 1099-OID not received, immediately below, and refer to Section I-B available at www. Free online tax filing for 2011 irs. Free online tax filing for 2011 gov/pub1212 by clicking the link under Recent Developments. Free online tax filing for 2011 Form 1099-OID not received. Free online tax filing for 2011   The OID listed is for each $1,000 of redemption price. Free online tax filing for 2011 You must adjust the listed amount if your debt instrument has a different principal amount. Free online tax filing for 2011 For example, if you have a debt instrument with a $500 principal amount, use one-half the listed amount to figure your OID. Free online tax filing for 2011   Use the OID shown in Section I-B for a calendar year if you held the debt instrument the entire year. Free online tax filing for 2011 (If your debt instrument is not listed in Section I-B, consult the issuer for information about the issue price, the yield to maturity, and the OID that accrued for that year. Free online tax filing for 2011 ) If you did not hold the debt instrument the entire year, figure your OID as follows. Free online tax filing for 2011 Look up the daily OID for the first accrual period in which you held the debt instrument during a calendar year. Free online tax filing for 2011 (See Accrual period under Constant yield method, later. Free online tax filing for 2011 ) Multiply the daily OID by the number of days you held the debt instrument during that accrual period. Free online tax filing for 2011 Repeat (1) and (2) for any remaining accrual periods in which you held the debt instrument. Free online tax filing for 2011 Add the results of (2) and (3). Free online tax filing for 2011 This is the OID to include in income for that year, unless you paid an acquisition premium. Free online tax filing for 2011 (The reduction for acquisition premium is discussed later. Free online tax filing for 2011 ) Tax-exempt bond. Free online tax filing for 2011   If you own a tax-exempt bond, figure your basis in the bond by adding to your cost the OID you would have included in income if the bond had been taxable. Free online tax filing for 2011 You need to make this adjustment to determine if you have a gain or loss on a later disposition of the bond. Free online tax filing for 2011 In general, use the rules that follow to determine your OID. Free online tax filing for 2011 Constant yield method. Free online tax filing for 2011   This discussion shows how to figure OID on debt instruments issued after 1984 using a constant yield method. Free online tax filing for 2011 (The special rules that apply to contingent payment debt instruments and inflation-indexed debt instruments are explained later. Free online tax filing for 2011 ) OID is allocated over the life of the debt instrument through adjustments to the issue price for each accrual period. Free online tax filing for 2011   Figure the OID allocable to any accrual period as follows. Free online tax filing for 2011 Multiply the adjusted issue price at the beginning of the accrual period by a fraction. Free online tax filing for 2011 The numerator of the fraction is the debt instrument's yield to maturity and the denominator is the number of accrual periods per year. Free online tax filing for 2011 The yield must be stated appropriately taking into account the length of the particular accrual period. Free online tax filing for 2011 Subtract from the result in (1) any qualified stated interest allocable to the accrual period. Free online tax filing for 2011 Accrual period. Free online tax filing for 2011   For debt instruments issued after 1984 and before April 4, 1994, an accrual period is each 6-month period that ends on the day that corresponds to the stated maturity date of the debt instrument or the date 6 months before that date. Free online tax filing for 2011 For example, a debt instrument maturing on March 31 has accrual periods that end on September 30 and March 31 of each calendar year. Free online tax filing for 2011 Any short period is included as the first accrual period. Free online tax filing for 2011   For debt instruments issued after April 3, 1994, accrual periods may be of any length and may vary in length over the term of the debt instrument, as long as each accrual period is no longer than 1 year and all payments are made on the first or last day of an accrual period. Free online tax filing for 2011 However, the OID listed for these debt instruments in Section I-B has been figured using 6-month accrual periods. Free online tax filing for 2011 Daily OID. Free online tax filing for 2011   The OID for any accrual period is allocated equally to each day in the accrual period. Free online tax filing for 2011 Figure the amount to include in income by adding the OID for each day you hold the debt instrument during the year. Free online tax filing for 2011 Since your tax year will usually include parts of two or more accrual periods, you must include the proper daily OID for each accrual period. Free online tax filing for 2011 If your debt instrument has 6-month accrual periods, your tax year will usually include one full 6-month accrual period and parts of two other 6-month periods. Free online tax filing for 2011 Figuring daily OID. Free online tax filing for 2011   The daily OID for the initial accrual period is figured using the following formula. Free online tax filing for 2011   (ip × ytm/n) − qsi     p   ip = issue price ytm = yield to maturity n = number of accrual periods in 1 year qsi = qualified stated interest p = number of days in accrual period       The daily OID for subsequent accrual periods is figured the same way except the adjusted issue price at the beginning of each period is used in the formula instead of the issue price. Free online tax filing for 2011 Example 5. Free online tax filing for 2011 On January 1 of Year 1, you bought a 15-year, 10% debt instrument of A Corporation at original issue for $86,235. Free online tax filing for 2011 17. Free online tax filing for 2011 According to the prospectus, the debt instrument matures on December 31 of Year 15 at a stated redemption price of $100,000. Free online tax filing for 2011 The yield to maturity is 12%, compounded semiannually. Free online tax filing for 2011 The debt instrument provides for qualified stated interest payments of $5,000 on June 30 and December 31 of each calendar year. Free online tax filing for 2011 The accrual periods are the 6-month periods ending on each of these dates. Free online tax filing for 2011 The number of days for the first accrual period (January 1 through June 30) is 181 days (182 for leap years). Free online tax filing for 2011 The daily OID for the first accrual period is figured as follows. Free online tax filing for 2011   ($86,235. Free online tax filing for 2011 17 x . Free online tax filing for 2011 12/2) – $5,000     181 days     = $174. Free online tax filing for 2011 11020 = $. Free online tax filing for 2011 96193   181           The adjusted issue price at the beginning of the second accrual period is the issue price plus the OID previously includible in income ($86,235. Free online tax filing for 2011 17 + $174. Free online tax filing for 2011 11), or $86,409. Free online tax filing for 2011 28. Free online tax filing for 2011 The number of days for the second accrual period (July 1 through December 31) is 184 days. Free online tax filing for 2011 The daily OID for the second accrual period is figured as follows. Free online tax filing for 2011   ($86,409. Free online tax filing for 2011 28 x . Free online tax filing for 2011 12/2) – $5,000     184 days     = $184. Free online tax filing for 2011 55681 = $1. Free online tax filing for 2011 00303   184 Since the first and second accrual periods coincide exactly with your tax year, you include in income for Year 1 the OID allocable to the first two accrual periods, $174. Free online tax filing for 2011 11 ($. Free online tax filing for 2011 95665 × 182 days) plus $184. Free online tax filing for 2011 56 ($1. Free online tax filing for 2011 00303 × 184 days), or $358. Free online tax filing for 2011 67. Free online tax filing for 2011 Add the OID to the $10,000 interest you report on your income tax return for Year 1. Free online tax filing for 2011 Example 6. Free online tax filing for 2011 Assume the same facts as in Example 5, except that you bought the debt instrument at original issue on May 1 of Year 1, with a maturity date of April 30, Year 16. Free online tax filing for 2011 Also, the interest payment dates are October 31 and April 30 of each calendar year. Free online tax filing for 2011 The accrual periods are the 6-month periods ending on each of these dates. Free online tax filing for 2011 The number of days for the first accrual period (May 1 through October 31) is 184 days. Free online tax filing for 2011 The daily OID for the first accrual period is figured as follows. Free online tax filing for 2011   ($86,235. Free online tax filing for 2011 17 x . Free online tax filing for 2011 12/2) – $5,000     184 days     = $174. Free online tax filing for 2011 11020 = $. Free online tax filing for 2011 94625   184           The number of days for the second accrual period (November 1 through April 30) is 181 days (182 for leap years). Free online tax filing for 2011 The daily OID for the second accrual period is figured as follows. Free online tax filing for 2011   ($86,409. Free online tax filing for 2011 28 x . Free online tax filing for 2011 12/2) – $5,000     181 days     = $184. Free online tax filing for 2011 55681 = $1. Free online tax filing for 2011 01965   181 If you hold the debt instrument through the end of Year 1, you must include $236. Free online tax filing for 2011 31 of OID in income. Free online tax filing for 2011 This is $174. Free online tax filing for 2011 11 ($. Free online tax filing for 2011 94625 × 184 days) for the period May 1 through October 31 plus $62. Free online tax filing for 2011 20 ($1. Free online tax filing for 2011 01965 × 61 days) for the period November 1 through December 31. Free online tax filing for 2011 The OID is added to the $5,000 interest income paid on October 31 of Year 1. Free online tax filing for 2011 Your basis in the debt instrument is increased by the OID you include in income. Free online tax filing for 2011 On January 1 of Year 2, your basis in the A Corporation debt instrument is $86,471. Free online tax filing for 2011 48 ($86,235. Free online tax filing for 2011 17 + $236. Free online tax filing for 2011 31). Free online tax filing for 2011 Short first accrual period. Free online tax filing for 2011   You may have to make adjustments if a debt instrument has a short first accrual period. Free online tax filing for 2011 For example, a debt instrument with 6-month accrual periods that is issued on February 15 and matures on October 31 has a short first accrual period that ends April 30. Free online tax filing for 2011 (The remaining accrual periods begin on May 1 and November 1. Free online tax filing for 2011 ) For this short period, figure the daily OID as described earlier, but adjust the yield for the length of the short accrual period. Free online tax filing for 2011 You may use any reasonable compounding method in determining OID for a short period. Free online tax filing for 2011 Examples of reasonable compounding methods include continuous compounding and monthly compounding (that is, simple interest within a month). Free online tax filing for 2011 Consult your tax advisor for more information about making this computation. Free online tax filing for 2011   The OID for the final accrual period is the difference between the amount payable at maturity (other than a payment of qualified stated interest) and the adjusted issue price at the beginning of the final accrual period. Free online tax filing for 2011 Reduction for acquisition premium. Free online tax filing for 2011   If you bought the debt instrument at an acquisition premium, figure the OID includible in income by reducing the daily OID by the daily acquisition premium. Free online tax filing for 2011 To figure the daily acquisition premium, multiply the daily OID by the following fraction. Free online tax filing for 2011 The numerator is the acquisition premium. Free online tax filing for 2011 The denominator is the total OID remaining for the debt instrument after your purchase date. Free online tax filing for 2011 Example 7. Free online tax filing for 2011 Assume the same facts as in Example 6, except that you bought the debt instrument on November 1 of Year 1 for $87,000, after its original issue on May 1 of Year 1. Free online tax filing for 2011 The adjusted issue price on November 1 of Year 1 is $86,409. Free online tax filing for 2011 28 ($86,235. Free online tax filing for 2011 17 + $174. Free online tax filing for 2011 11). Free online tax filing for 2011 In this case, you paid an acquisition premium of $590. Free online tax filing for 2011 72 ($87,000 − $86,409. Free online tax filing for 2011 28). Free online tax filing for 2011 The daily OID for the accrual period November 1 through April 30, reduced for the acquisition premium, is figured as follows. Free online tax filing for 2011 1) Daily OID on date of purchase (2nd accrual period) $1. Free online tax filing for 2011 01965*  2)  Acquisition premium $590. Free online tax filing for 2011 72    3)  Total OID remaining after purchase date ($13,764. Free online tax filing for 2011 83 − $174. Free online tax filing for 2011 11) 13,590. Free online tax filing for 2011 72   4) Line 2 ÷ line 3 . Free online tax filing for 2011 04346  5)  Line 1 × line 4 . Free online tax filing for 2011 04432  6)  Daily OID reduced for the acquisition premium. Free online tax filing for 2011 Line 1 − line 5 $0. Free online tax filing for 2011 97533  * As shown in Example 6. Free online tax filing for 2011 The total OID to include in income for Year 1 is $59. Free online tax filing for 2011 50 ($. Free online tax filing for 2011 97533 × 61 days). Free online tax filing for 2011 Contingent Payment Debt Instruments This discussion shows how to figure OID on a contingent payment debt instrument issued after August 12, 1996, that was issued for cash or publicly traded property. Free online tax filing for 2011 In general, a contingent payment debt instrument provides for one or more payments that are contingent as to timing or amount. Free online tax filing for 2011 If you hold a contingent payment bond, you must report OID as it accrues each year. Free online tax filing for 2011 Because the actual payments on a contingent payment debt instrument cannot be known in advance, issuers and holders cannot use the constant yield method (discussed earlier under Debt Instruments Issued After 1984) without making certain assumptions about the payments on the debt instrument. Free online tax filing for 2011 To figure OID accruals on contingent payment debt instruments, holders and issuers must use the noncontingent bond method. Free online tax filing for 2011 Noncontingent bond method. Free online tax filing for 2011    Under this method, the issuer must compute a comparable yield for the debt instrument and, based on this yield, construct a projected payment schedule for the instrument, which includes a projected fixed amount for each contingent payment. Free online tax filing for 2011 In general, holders and issuers accrue OID on this projected payment schedule using the constant yield method that applies to fixed payment debt instruments. Free online tax filing for 2011 When a contingent payment differs from the projected fixed amount, the holders and issuers make adjustments to their OID accruals. Free online tax filing for 2011 If the actual contingent payment is larger than expected, both the issuer and the holder increase their OID accruals. Free online tax filing for 2011 If the actual contingent payment is smaller than expected, holders and issuers generally decrease their OID accruals. Free online tax filing for 2011 Form 1099-OID. Free online tax filing for 2011   The amount shown on Form 1099-OID in box 1 you receive for a contingent payment debt instrument may not be the correct amount to include in income. Free online tax filing for 2011 For example, the amount may not be correct if the contingent payment was different from the projected amount. Free online tax filing for 2011 If the amount in box 1 is not correct, you must figure the OID to report on your return under the following rules. Free online tax filing for 2011 For information on showing an OID adjustment on your tax return, see How To Report OID, earlier. Free online tax filing for 2011 Figuring OID. Free online tax filing for 2011   To figure OID on a contingent payment debt instrument, you need to know the “comparable yield” and “projected payment schedule” of the debt instrument. Free online tax filing for 2011 The issuer must make these available to you. Free online tax filing for 2011 Comparable yield. Free online tax filing for 2011   The comparable yield generally is the yield at which the issuer would issue a fixed rate debt instrument with terms and conditions similar to those of the contingent payment debt instrument. Free online tax filing for 2011 The comparable yield is determined as of the debt instrument's issue date. Free online tax filing for 2011 Projected payment schedule. Free online tax filing for 2011   The projected payment schedule for a contingent payment debt instrument includes all fixed payments due under the instrument and a projected fixed amount for each contingent payment. Free online tax filing for 2011 The projected payment schedule is created by the issuer as of the debt instrument's issue date. Free online tax filing for 2011 It is used to determine the issuer's and holder's interest accruals and adjustments. Free online tax filing for 2011 Steps for figuring OID. Free online tax filing for 2011   Figure the OID on a contingent payment debt instrument in two steps. Free online tax filing for 2011 Figure the OID using the constant yield method (discussed earlier under Debt Instruments Issued After 1984 ) that applies to fixed payment debt instruments. Free online tax filing for 2011 Use the comparable yield as the yield to maturity. Free online tax filing for 2011 In general, use the projected payment schedule to determine the instrument's adjusted issue price at the beginning of each accrual period (other than the initial period). Free online tax filing for 2011 Do not treat any amount payable as qualified stated interest. Free online tax filing for 2011 Adjust the OID in (1) to account for actual contingent payments. Free online tax filing for 2011 If the contingent payment is greater than the projected fixed amount, you have a positive adjustment. Free online tax filing for 2011 If the contingent payment is less than the projected fixed amount, you have a negative adjustment. Free online tax filing for 2011 Net positive adjustment. Free online tax filing for 2011   A net positive adjustment exists for a tax year when the total of any positive adjustments described in (2) above for the tax year is more than the total of any negative adjustments for the tax year. Free online tax filing for 2011 Treat a net positive adjustment as additional OID for the tax year. Free online tax filing for 2011 Net negative adjustment. Free online tax filing for 2011   A net negative adjustment exists for a tax year when the total of any negative adjustments described in (2) above for the tax year is more than the total of any positive adjustments for the tax year. Free online tax filing for 2011 Use a net negative adjustment to offset OID on the debt instrument for the tax year. Free online tax filing for 2011 If the net negative adjustment is more than the OID on the debt instrument for the tax year, you can claim the difference as an ordinary loss. Free online tax filing for 2011 However, the amount you can claim as an ordinary loss is limited to the OID on the debt instrument you included in income in prior tax years. Free online tax filing for 2011 You must carry forward any net negative adjustment that is more than the total OID for the tax year and prior tax years and treat it as a negative adjustment in the next tax year. Free online tax filing for 2011 Basis adjustments. Free online tax filing for 2011   In general, increase your basis in a contingent payment debt instrument by the OID included in income. Free online tax filing for 2011 Your basis, however, is not affected by any negative or positive adjustments. Free online tax filing for 2011 Decrease your basis by any noncontingent payment received and the projected contingent payment scheduled to be received. Free online tax filing for 2011 Treatment of gain or loss on sale or exchange. Free online tax filing for 2011   If you sell a contingent payment debt instrument at a gain, your gain is ordinary income (interest income), even if you hold the debt instrument as a capital asset. Free online tax filing for 2011 If you sell a contingent payment debt instrument at a loss, your loss is an ordinary loss to the extent of your prior OID accruals on the debt instrument. Free online tax filing for 2011 If the debt instrument is a capital asset, treat any loss that is more than your prior OID accruals as a capital loss. Free online tax filing for 2011 See Regulations section 1. Free online tax filing for 2011 1275-4 for exceptions to these rules. Free online tax filing for 2011 Premium, acquisition premium, and market discount. Free online tax filing for 2011   The rules for accruing premium, acquisition premium, and market discount do not apply to a contingent payment debt instrument. Free online tax filing for 2011 See Regulations section 1. Free online tax filing for 2011 1275-4 to determine how to account for these items. Free online tax filing for 2011 Inflation-Indexed Debt Instruments This discussion shows how you figure OID on certain inflation-indexed debt instruments issued after January 5, 1997. Free online tax filing for 2011 An inflation-indexed debt instrument is generally a debt instrument on which the payments are adjusted for inflation and d
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Free online tax filing for 2011 Publication 925 - Main Content Table of Contents Passive Activity LimitsWho Must Use These Rules? Passive Activity Loss Passive Activity Credit Publicly Traded Partnership Excess Farm Loss Passive Activities Activities That Are Not Passive Activities Passive Activity Income and Deductions Grouping Your Activities Recharacterization of Passive Income Dispositions How To Report Your Passive Activity Loss Comprehensive ExampleGeneral Information At-Risk LimitsWho Is Affected? Activities Covered by the At-Risk Rules At-Risk Amounts Amounts Not At Risk Reductions of Amounts At Risk Recapture Rule How To Get Tax HelpLow Income Taxpayer Clinics Passive Activity Limits Who Must Use These Rules? The passive activity rules apply to: Individuals, Estates, Trusts (other than grantor trusts), Personal service corporations, and Closely held corporations. Free online tax filing for 2011 Even though the rules do not apply to grantor trusts, partnerships, and S corporations directly, they do apply to the owners of these entities. Free online tax filing for 2011 For information about personal service corporations and closely held corporations, including definitions and how the passive activity rules apply to these corporations, see Form 8810 and its instructions. Free online tax filing for 2011 Before applying the passive activity limits, you must first determine the amount of the deductions disallowed under the basis, excess farm loss, or at-risk rules. Free online tax filing for 2011 See Passive Activity Deductions, later. Free online tax filing for 2011 Passive Activity Loss Generally, the passive activity loss for the tax year is not allowed. Free online tax filing for 2011 However, there is a special allowance under which some or all of your passive activity loss may be allowed. Free online tax filing for 2011 See Special $25,000 allowance , later. Free online tax filing for 2011 Definition of passive activity loss. Free online tax filing for 2011    Generally, your passive activity loss for the tax year is the excess of your passive activity deductions over your passive activity gross income. Free online tax filing for 2011 See Passive Activity Income and Deductions , later. Free online tax filing for 2011   For a closely held corporation, the passive activity loss is the excess of passive activity deductions over the sum of passive activity gross income and net active income. Free online tax filing for 2011 For details on net active income, see the Instructions for Form 8810. Free online tax filing for 2011 For the definition of passive activity gross income, see Passive Activity Income , later. Free online tax filing for 2011 For the definition of passive activity deductions, see Passive Activity Deductions , later. Free online tax filing for 2011 Identification of Disallowed Passive Activity Deductions If all or a part of your passive activity loss is disallowed for the tax year, you may need to allocate the disallowed passive activity loss among different passive activities and among different deductions within a passive activity. Free online tax filing for 2011 Allocation of disallowed passive activity loss among activities. Free online tax filing for 2011   If all or any part of your passive activity loss is disallowed for the tax year, a ratable portion of the loss (if any) from each of your passive activities is disallowed. Free online tax filing for 2011 The ratable portion of a loss from an activity is computed by multiplying the passive activity loss that is disallowed for the tax year by the fraction obtained by dividing: The loss from the activity for the tax year; by The sum of the losses for the tax year from all activities having losses for the tax year. Free online tax filing for 2011 Use Worksheet 5 of Form 8582 to figure the ratable portion of the loss from each activity that is disallowed. Free online tax filing for 2011 Loss from an activity. Free online tax filing for 2011   The term “loss from an activity” means: The amount by which the passive activity deductions (defined later) from the activity for the tax year exceed the passive activity gross income (defined later) from the activity for the tax year; reduced by Any part of such amount that is allowed under the Special $25,000 Allowance , later. Free online tax filing for 2011   If your passive activity gross income from significant participation passive activities (defined later) for the tax year is more than your passive activity deductions from those activities for the tax year, those activities shall be treated, solely for purposes of figuring your loss from the activity, as a single activity that does not have a loss for such taxable year. Free online tax filing for 2011 See Significant Participation Passive Activities , later. Free online tax filing for 2011 Example. Free online tax filing for 2011 John Pine holds interests in three passive activities, A, B, and C. Free online tax filing for 2011 The gross income and deductions from these activities for the taxable year are as follows:   A B C Total Gross income $7,000 $4,000 $12,000 $23,000 Deductions (16,000) (20,000) (8,000) (44,000)           Net income (loss) ($9,000) ($16,000) $4,000 ($21,000)   John Pine’s $21,000 passive activity loss for the taxable year is disallowed. Free online tax filing for 2011 Therefore, a ratable portion of the losses from activities A and B is disallowed. Free online tax filing for 2011 He figures the disallowed portion of each loss as follows: A: $21,000 x $9,000/$25,000 $7,560 B: $21,000 x $16,000/$25,000 13,440     Total $21,000 Allocation within loss activities. Free online tax filing for 2011   If all or any part of your loss from an activity is disallowed under Allocation of disallowed passive activity loss among activities for the tax year, a ratable portion of each of your passive activity deductions (defined later), other than an excluded deduction (defined below) from such activity is disallowed. Free online tax filing for 2011 The ratable portion of a passive activity deduction is the amount of the disallowed portion of the loss from the activity for the tax year multiplied by the fraction obtained by dividing: The amount of such deduction; by The sum of all of your passive activity deductions (other than excluded deductions) from that activity from the tax year. Free online tax filing for 2011 Excluded deductions. Free online tax filing for 2011    “Excluded deduction” means any passive activity deduction that is taken into account in computing your net income from an item of property for a taxable year in which an amount of the taxpayer's gross income from such item of property is treated as not from a passive activity. Free online tax filing for 2011 See Recharacterization of Passive Income , later. Free online tax filing for 2011 Separately identified deductions. Free online tax filing for 2011   In identifying the deductions from an activity that are disallowed, you do not need to account separately for a deduction unless such deduction may, if separately taken into account, result in an income tax liability for any tax year different from that which would result were such deduction not taken into account separately. Free online tax filing for 2011   Use Form 8582, Worksheet 7, for any activity if you have passive activity deductions for that activity that must be separately identified. Free online tax filing for 2011   Deductions that must be accounted for separately include (but are not limited to) the following deductions. Free online tax filing for 2011 Deductions that arise in a rental real estate activity in tax years in which you actively participate in such activity. Free online tax filing for 2011 See Active participation , later. Free online tax filing for 2011 Deductions that arise in a rental real estate activity in tax years in which you do not actively participate in such activity. Free online tax filing for 2011 See Active participation , later. Free online tax filing for 2011 Losses from sales or exchanges of capital assets. Free online tax filing for 2011 Section 1231 losses. Free online tax filing for 2011 See Section 1231 Gains and Losses in Publication 544, Sales and Other Disposition of Assets, for more information. Free online tax filing for 2011 Carryover of Disallowed Deductions In the case of an activity with respect to which any deductions or credits are disallowed for a taxable year (the loss activity), the disallowed deductions are allocated among your activities for the next tax year in a manner that reasonably reflects the extent to which each activity continues the loss activity. Free online tax filing for 2011 The disallowed deductions or credits allocated to an activity under the preceding sentence are treated as deductions or credits from the activity for the next tax year. Free online tax filing for 2011 For more information, see Regulations section 1. Free online tax filing for 2011 469-1(f)(4). Free online tax filing for 2011 Passive Activity Credit Generally, the passive activity credit for the tax year is disallowed. Free online tax filing for 2011 The passive activity credit is the amount by which the sum of all your credits subject to the passive activity rules exceed your regular tax liability allocable to all passive activities for the tax year. Free online tax filing for 2011 Credits that are included in figuring the general business credit are subject to the passive activity rules. Free online tax filing for 2011 See the Instructions for Form 8582-CR for more information. Free online tax filing for 2011 Publicly Traded Partnership You must apply the rules in this part separately to your income or loss from a passive activity held through a publicly traded partnership (PTP). Free online tax filing for 2011 You also must apply the limit on passive activity credits separately to your credits from a passive activity held through a PTP. Free online tax filing for 2011 You can offset deductions from passive activities of a PTP only against income or gain from passive activities of the same PTP. Free online tax filing for 2011 Likewise, you can offset credits from passive activities of a PTP only against the tax on the net passive income from the same PTP. Free online tax filing for 2011 This separate treatment rule also applies to a regulated investment company holding an interest in a PTP for the items attributable to that interest. Free online tax filing for 2011 For more information on how to apply the passive activity loss rules to PTPs, and on how to apply the limit on passive activity credits to PTPs, see Publicly Traded Partnerships (PTPs) in the Instructions for Forms 8582 and 8582-CR, respectively. Free online tax filing for 2011 Excess Farm Loss If you receive an applicable subsidy for any tax year and you have an excess farm loss for the tax year, special rules apply. Free online tax filing for 2011 These rules do not apply to C corporations. Free online tax filing for 2011 For information, see the Instructions for Schedule F (Form 1040), Profit or Loss From Farming. Free online tax filing for 2011 Passive Activities There are two kinds of passive activities. Free online tax filing for 2011 Trade or business activities in which you do not materially participate during the year. Free online tax filing for 2011 Rental activities, even if you do materially participate in them, unless you are a real estate professional. Free online tax filing for 2011 Material participation in a trade or business is discussed later, under Activities That Are Not Passive Activities . Free online tax filing for 2011 Treatment of former passive activities. Free online tax filing for 2011   A former passive activity is an activity that was a passive activity in any earlier tax year, but is not a passive activity in the current tax year. Free online tax filing for 2011 You can deduct a prior year's unallowed loss from the activity up to the amount of your current year net income from the activity. Free online tax filing for 2011 Treat any remaining prior year unallowed loss like you treat any other passive loss. Free online tax filing for 2011   In addition, any prior year unallowed passive activity credits from a former passive activity offset the allocable part of your current year tax liability. Free online tax filing for 2011 The allocable part of your current year tax liability is that part of this year's tax liability that is allocable to the current year net income from the former passive activity. Free online tax filing for 2011 You figure this after you reduce your net income from the activity by any prior year unallowed loss from that activity (but not below zero). Free online tax filing for 2011 Trade or Business Activities A trade or business activity is an activity that: Involves the conduct of a trade or business (that is, deductions would be allowable under section 162 of the Internal Revenue Code if other limitations, such as the passive activity rules, did not apply), Is conducted in anticipation of starting a trade or business, or Involves research or experimental expenditures that are deductible under Internal Revenue Code section 174 (or that would be deductible if you chose to deduct rather than capitalize them). Free online tax filing for 2011 A trade or business activity does not include a rental activity or the rental of property that is incidental to an activity of holding the property for investment. Free online tax filing for 2011 You generally report trade or business activities on Schedule C, C-EZ, F, or in Part II or III of Schedule E. Free online tax filing for 2011 Rental Activities A rental activity is a passive activity even if you materially participated in that activity, unless you materially participated as a real estate professional. Free online tax filing for 2011 See Real Estate Professional under Activities That Are Not Passive Activities, later. Free online tax filing for 2011 An activity is a rental activity if tangible property (real or personal) is used by customers or held for use by customers, and the gross income (or expected gross income) from the activity represents amounts paid (or to be paid) mainly for the use of the property. Free online tax filing for 2011 It does not matter whether the use is under a lease, a service contract, or some other arrangement. Free online tax filing for 2011 Exceptions. Free online tax filing for 2011   Your activity is not a rental activity if any of the following apply. Free online tax filing for 2011 The average period of customer use of the property is 7 days or less. Free online tax filing for 2011 You figure the average period of customer use by dividing the total number of days in all rental periods by the number of rentals during the tax year. Free online tax filing for 2011 If the activity involves renting more than one class of property, multiply the average period of customer use of each class by a fraction. Free online tax filing for 2011 The numerator of the fraction is the gross rental income from that class of property and the denominator is the activity's total gross rental income. Free online tax filing for 2011 The activity's average period of customer use will equal the sum of the amounts for each class. Free online tax filing for 2011 The average period of customer use of the property, as figured in (1) above, is 30 days or less and you provide significant personal services with the rentals. Free online tax filing for 2011 Significant personal services include only services performed by individuals. Free online tax filing for 2011 To determine if personal services are significant, all relevant facts and circumstances are taken into consideration, including the frequency of the services, the type and amount of labor required to perform the services, and the value of the services relative to the amount charged for use of the property. Free online tax filing for 2011 Significant personal services do not include the following. Free online tax filing for 2011 Services needed to permit the lawful use of the property, Services to repair or improve property that would extend its useful life for a period substantially longer than the average rental, and Services that are similar to those commonly provided with long-term rentals of real estate, such as cleaning and maintenance of common areas or routine repairs. Free online tax filing for 2011 You provide extraordinary personal services in making the rental property available for customer use. Free online tax filing for 2011 Services are extraordinary personal services if they are performed by individuals and the customers' use of the property is incidental to their receipt of the services. Free online tax filing for 2011 The rental is incidental to a nonrental activity. Free online tax filing for 2011 The rental of property is incidental to an activity of holding property for investment if the main purpose of holding the property is to realize a gain from its appreciation and the gross rental income from the property is less than 2% of the smaller of the property's unadjusted basis or fair market value. Free online tax filing for 2011 The unadjusted basis of property is its cost not reduced by depreciation or any other basis adjustment. Free online tax filing for 2011 The rental of property is incidental to a trade or business activity if all of the following apply. Free online tax filing for 2011 You own an interest in the trade or business activity during the year. Free online tax filing for 2011 The rental property was used mainly in that trade or business activity during the current year, or during at least 2 of the 5 preceding tax years. Free online tax filing for 2011 Your gross rental income from the property is less than 2% of the smaller of its unadjusted basis or fair market value. Free online tax filing for 2011 Lodging provided to an employee or the employee's spouse or dependents is incidental to the activity or activities in which the employee performs services if the lodging is furnished for the employer's convenience. Free online tax filing for 2011 You customarily make the rental property available during defined business hours for nonexclusive use by various customers. Free online tax filing for 2011 You provide the property for use in a nonrental activity in your capacity as an owner of an interest in the partnership, S corporation, or joint venture conducting that activity. Free online tax filing for 2011    If you meet any of the exceptions listed above, see the instructions for Form 8582 for information about how to report any income or loss from the activity. Free online tax filing for 2011 Special $25,000 allowance. Free online tax filing for 2011   If you or your spouse actively participated in a passive rental real estate activity, the amount of the passive activity loss that is disallowed is decreased and you therefore can deduct up to $25,000 of loss from the activity from your nonpassive income. Free online tax filing for 2011 This special allowance is an exception to the general rule disallowing the passive activity loss. Free online tax filing for 2011 Similarly, you can offset credits from the activity against the tax on up to $25,000 of nonpassive income after taking into account any losses allowed under this exception. Free online tax filing for 2011   If you are married, filing a separate return, and lived apart from your spouse for the entire tax year, your special allowance cannot be more than $12,500. Free online tax filing for 2011 If you lived with your spouse at any time during the year and are filing a separate return, you cannot use the special allowance to reduce your nonpassive income or tax on nonpassive income. Free online tax filing for 2011   The maximum special allowance is reduced if your modified adjusted gross income exceeds certain amounts. Free online tax filing for 2011 See Phaseout rule , later. Free online tax filing for 2011 Example. Free online tax filing for 2011 Kate, a single taxpayer, has $70,000 in wages, $15,000 income from a limited partnership, a $26,000 loss from rental real estate activities in which she actively participated, and is not subject to the modified adjusted gross income phaseout rule. Free online tax filing for 2011 She can use $15,000 of her $26,000 loss to offset her $15,000 passive income from the partnership. Free online tax filing for 2011 She actively participated in her rental real estate activities, so she can use the remaining $11,000 rental real estate loss to offset $11,000 of her nonpassive income (wages). Free online tax filing for 2011 Commercial revitalization deduction (CRD). Free online tax filing for 2011   The special allowance must first be applied to losses from rental real estate activities figured without the CRD. Free online tax filing for 2011 Any remaining part of the special allowance is available for the CRD from the rental real estate activities and is not subject to the active participation rules or the phaseout based on modified adjusted gross income. Free online tax filing for 2011 You cannot claim a CRD for a building placed in service after December 31, 2009. Free online tax filing for 2011 Active participation. Free online tax filing for 2011   Active participation is not the same as material participation (defined later). Free online tax filing for 2011 Active participation is a less stringent standard than material participation. Free online tax filing for 2011 For example, you may be treated as actively participating if you make management decisions in a significant and bona fide sense. Free online tax filing for 2011 Management decisions that count as active participation include approving new tenants, deciding on rental terms, approving expenditures, and similar decisions. Free online tax filing for 2011   Only individuals can actively participate in rental real estate activities. Free online tax filing for 2011 However, a decedent's estate is treated as actively participating for its tax years ending less than 2 years after the decedent's death, if the decedent would have satisfied the active participation requirement for the activity for the tax year the decedent died. Free online tax filing for 2011   A decedent's qualified revocable trust can also be treated as actively participating if both the trustee and the executor (if any) of the estate choose to treat the trust as part of the estate. Free online tax filing for 2011 The choice applies to tax years ending after the decedent's death and before: 2 years after the decedent's death if no estate tax return is required, or 6 months after the estate tax liability is finally determined if an estate tax return is required. Free online tax filing for 2011   The choice is irrevocable and cannot be made later than the due date for the estate's first income tax return (including any extensions). Free online tax filing for 2011   Limited partners are not treated as actively participating in a partnership's rental real estate activities. Free online tax filing for 2011   You are not treated as actively participating in a rental real estate activity unless your interest in the activity (including your spouse's interest) was at least 10% (by value) of all interests in the activity throughout the year. Free online tax filing for 2011   Active participation is not required to take the low-income housing credit, the rehabilitation investment credit, or CRD from rental real estate activities. Free online tax filing for 2011 Example. Free online tax filing for 2011 Mike, a single taxpayer, had the following income and loss during the tax year: Salary $42,300 Dividends 300 Interest 1,400 Rental loss (4,000) The rental loss came from a house Mike owned. Free online tax filing for 2011 He advertised and rented the house to the current tenant himself. Free online tax filing for 2011 He also collected the rents and did the repairs or hired someone to do them. Free online tax filing for 2011 Even though the rental loss is a loss from a passive activity, Mike can use the entire $4,000 loss to offset his other income because he actively participated. Free online tax filing for 2011 Phaseout rule. Free online tax filing for 2011   The maximum special allowance of $25,000 ($12,500 for married individuals filing separate returns and living apart at all times during the year) is reduced by 50% of the amount of your modified adjusted gross income that is more than $100,000 ($50,000 if you are married filing separately). Free online tax filing for 2011 If your modified adjusted gross income is $150,000 or more ($75,000 or more if you are married filing separately), you generally cannot use the special allowance. Free online tax filing for 2011    Modified adjusted gross income for this purpose is your adjusted gross income figured without the following. Free online tax filing for 2011 Taxable social security and tier 1 railroad retirement benefits. Free online tax filing for 2011 Deductible contributions to individual retirement accounts (IRAs) and section 501(c)(18) pension plans. Free online tax filing for 2011 The exclusion from income of interest from qualified U. Free online tax filing for 2011 S. Free online tax filing for 2011 savings bonds used to pay qualified higher education expenses. Free online tax filing for 2011 The exclusion from income of amounts received from an employer's adoption assistance program. Free online tax filing for 2011 Passive activity income or loss included on Form 8582. Free online tax filing for 2011 Any rental real estate loss allowed because you materially participated in the rental activity as a Real Estate Professional (as discussed later, under Activities That Are Not Passive Activities). Free online tax filing for 2011 Any overall loss from a publicly traded partnership (see Publicly Traded Partnerships (PTPs) in the instructions for Form 8582). Free online tax filing for 2011 The deduction for the employer-equivalent portion of self-employment tax. Free online tax filing for 2011 The deduction for domestic production activities. Free online tax filing for 2011 The deduction allowed for interest on student loans. Free online tax filing for 2011 The deduction for qualified tuition and related expenses. Free online tax filing for 2011 Example. Free online tax filing for 2011 During 2013, John was unmarried and was not a real estate professional. Free online tax filing for 2011 For 2013, he had $120,000 in salary and a $31,000 loss from his rental real estate activities in which he actively participated. Free online tax filing for 2011 His modified adjusted gross income is $120,000. Free online tax filing for 2011 When he files his 2013 return, he can deduct only $15,000 of his passive activity loss. Free online tax filing for 2011 He must carry over the remaining $16,000 passive activity loss to 2014. Free online tax filing for 2011 He figures his deduction and carryover as follows: Adjusted gross income, modified as required $120,000       Minus amount not subject to phaseout 100,000 Amount subject to phaseout rule $20,000 Multiply by 50% × 50% Required reduction to special allowance $10,000 Maximum special allowance $25,000 Minus required reduction (see above) 10,000 Adjusted special allowance $15,000 Passive loss from rental real estate $31,000 Deduction allowable/Adjusted  special allowance (see above) 15,000       Amount that must be carried forward $16,000 Exceptions to the phaseout rules. Free online tax filing for 2011   A higher phaseout range applies to rehabilitation investment credits from rental real estate activities. Free online tax filing for 2011 For those credits, the phaseout of the $25,000 special allowance starts when your modified adjusted gross income exceeds $200,000 ($100,000 if you are a married individual filing a separate return and living apart at all times during the year). Free online tax filing for 2011   There is no phaseout of the $25,000 special allowance for low-income housing credits or for the CRD. Free online tax filing for 2011 Ordering rules. Free online tax filing for 2011   If you have more than one of the exceptions to the phaseout rules in the same tax year, you must apply the $25,000 phaseout against your passive activity losses and credits in the following order. Free online tax filing for 2011 The portion of passive activity losses not attributable to the CRD. Free online tax filing for 2011 The portion of passive activity losses attributable to the CRD. Free online tax filing for 2011 The portion of passive activity credits attributable to credits other than the rehabilitation and low-income housing credits. Free online tax filing for 2011 The portion of passive activity credits attributable to the rehabilitation credit. Free online tax filing for 2011 The portion of passive activity credits attributable to the low-income housing credit. Free online tax filing for 2011 Activities That Are Not Passive Activities The following are not passive activities. Free online tax filing for 2011 Trade or business activities in which you materially participated for the tax year. Free online tax filing for 2011 A working interest in an oil or gas well which you hold directly or through an entity that does not limit your liability (such as a general partner interest in a partnership). Free online tax filing for 2011 It does not matter whether you materially participated in the activity for the tax year. Free online tax filing for 2011 However, if your liability was limited for part of the year (for example, you converted your general partner interest to a limited partner interest during the year) and you had a net loss from the well for the year, some of your income and deductions from the working interest may be treated as passive activity gross income and passive activity deductions. Free online tax filing for 2011  See Temporary Regulations section 1. Free online tax filing for 2011 469-1T(e)(4)(ii). Free online tax filing for 2011 The rental of a dwelling unit that you also used for personal purposes during the year for more than the greater of 14 days or 10% of the number of days during the year that the home was rented at a fair rental. Free online tax filing for 2011 An activity of trading personal property for the account of those who own interests in the activity. Free online tax filing for 2011 See Temporary Regulations section 1. Free online tax filing for 2011 469-1T(e)(6). Free online tax filing for 2011 Rental real estate activities in which you materially participated as a real estate professional. Free online tax filing for 2011 See Real Estate Professional , later. Free online tax filing for 2011 You should not enter income and losses from these activities on Form 8582. Free online tax filing for 2011 Instead, enter them on the forms or schedules you would normally use. Free online tax filing for 2011 Material Participation A trade or business activity is not a passive activity if you materially participated in the activity. Free online tax filing for 2011 Material participation tests. Free online tax filing for 2011    You materially participated in a trade or business activity for a tax year if you satisfy any of the following tests. Free online tax filing for 2011 You participated in the activity for more than 500 hours. Free online tax filing for 2011 Your participation was substantially all the participation in the activity of all individuals for the tax year, including the participation of individuals who did not own any interest in the activity. Free online tax filing for 2011 You participated in the activity for more than 100 hours during the tax year, and you participated at least as much as any other individual (including individuals who did not own any interest in the activity) for the year. Free online tax filing for 2011 The activity is a significant participation activity, and you participated in all significant participation activities for more than 500 hours. Free online tax filing for 2011 A significant participation activity is any trade or business activity in which you participated for more than 100 hours during the year and in which you did not materially participate under any of the material participation tests, other than this test. Free online tax filing for 2011 See Significant Participation Passive Activities , under Recharacterization of Passive Income, later. Free online tax filing for 2011 You materially participated in the activity for any 5 (whether or not consecutive) of the 10 immediately preceding tax years. Free online tax filing for 2011 The activity is a personal service activity in which you materially participated for any 3 (whether or not consecutive) preceding tax years. Free online tax filing for 2011 An activity is a personal service activity if it involves the performance of personal services in the fields of health (including veterinary services), law, engineering, architecture, accounting, actuarial science, performing arts, consulting, or any other trade or business in which capital is not a material income-producing factor. Free online tax filing for 2011 Based on all the facts and circumstances, you participated in the activity on a regular, continuous, and substantial basis during the year. Free online tax filing for 2011   You did not materially participate in the activity under test (7) if you participated in the activity for 100 hours or less during the year. Free online tax filing for 2011 Your participation in managing the activity does not count in determining whether you materially participated under this test if: Any person other than you received compensation for managing the activity, or Any individual spent more hours during the tax year managing the activity than you did (regardless of whether the individual was compensated for the management services). Free online tax filing for 2011 Participation. Free online tax filing for 2011   In general, any work you do in connection with an activity in which you own an interest is treated as participation in the activity. Free online tax filing for 2011 Work not usually performed by owners. Free online tax filing for 2011   You do not treat the work you do in connection with an activity as participation in the activity if both of the following are true. Free online tax filing for 2011 The work is not work that is customarily done by the owner of that type of activity. Free online tax filing for 2011 One of your main reasons for doing the work is to avoid the disallowance of any loss or credit from the activity under the passive activity rules. Free online tax filing for 2011 Participation as an investor. Free online tax filing for 2011   You do not treat the work you do in your capacity as an investor in an activity as participation unless you are directly involved in the day-to-day management or operations of the activity. Free online tax filing for 2011 Work you do as an investor includes: Studying and reviewing financial statements or reports on operations of the activity, Preparing or compiling summaries or analyses of the finances or operations of the activity for your own use, and Monitoring the finances or operations of the activity in a nonmanagerial capacity. Free online tax filing for 2011 Spouse's participation. Free online tax filing for 2011   Your participation in an activity includes your spouse's participation. Free online tax filing for 2011 This applies even if your spouse did not own any interest in the activity and you and your spouse do not file a joint return for the year. Free online tax filing for 2011 Proof of participation. Free online tax filing for 2011 You can use any reasonable method to prove your participation in an activity for the year. Free online tax filing for 2011 You do not have to keep contemporaneous daily time reports, logs, or similar documents if you can establish your participation in some other way. Free online tax filing for 2011 For example, you can show the services you performed and the approximate number of hours spent by using an appointment book, calendar, or narrative summary. Free online tax filing for 2011 Limited partners. Free online tax filing for 2011   If you owned an activity as a limited partner, you generally are not treated as materially participating in the activity. Free online tax filing for 2011 However, you are treated as materially participating in the activity if you met test (1), (5), or (6) under Material participation tests , discussed earlier, for the tax year. Free online tax filing for 2011   You are not treated as a limited partner, however, if you also were a general partner in the partnership at all times during the partnership's tax year ending with or within your tax year (or, if shorter, during that part of the partnership's tax year in which you directly or indirectly owned your limited partner interest). Free online tax filing for 2011 Retired or disabled farmer and surviving spouse of a farmer. Free online tax filing for 2011   If you are a retired or disabled farmer, you are treated as materially participating in a farming activity if you materially participated for 5 or more of the 8 years before your retirement or disability. Free online tax filing for 2011 Similarly, if you are a surviving spouse of a farmer, you are treated as materially participating in a farming activity if the real property used in the activity meets the estate tax rules for special valuation of farm property passed from a qualifying decedent, and you actively manage the farm. Free online tax filing for 2011 Corporations. Free online tax filing for 2011   A closely held corporation or a personal service corporation is treated as materially participating in an activity only if one or more shareholders holding more than 50% by value of the outstanding stock of the corporation materially participate in the activity. Free online tax filing for 2011   A closely held corporation can also satisfy the material participation standard by meeting the first two requirements for the qualifying business exception from the at-risk limits. Free online tax filing for 2011 See Special exception for qualified corporations under Activities Covered by the At-Risk Rules, later. Free online tax filing for 2011 Real Estate Professional Generally, rental activities are passive activities even if you materially participated in them. Free online tax filing for 2011 However, if you qualified as a real estate professional, rental real estate activities in which you materially participated are not passive activities. Free online tax filing for 2011 For this purpose, each interest you have in a rental real estate activity is a separate activity, unless you choose to treat all interests in rental real estate activities as one activity. Free online tax filing for 2011 See the Instructions for Schedule E (Form 1040), Supplemental Income and Loss, for information about making this choice. Free online tax filing for 2011 If you qualified as a real estate professional for 2013, report income or losses from rental real estate activities in which you materially participated as nonpassive income or losses, and complete line 43 of Schedule E (Form 1040). Free online tax filing for 2011 If you also have an unallowed loss from these activities from an earlier year when you did not qualify, see Treatment of former passive activities under Passive Activities, earlier. Free online tax filing for 2011 Qualifications. Free online tax filing for 2011   You qualified as a real estate professional for the year if you met both of the following requirements. Free online tax filing for 2011 More than half of the personal services you performed in all trades or businesses during the tax year were performed in real property trades or businesses in which you materially participated. Free online tax filing for 2011 You performed more than 750 hours of services during the tax year in real property trades or businesses in which you materially participated. Free online tax filing for 2011   Do not count personal services you performed as an employee in real property trades or businesses unless you were a 5% owner of your employer. Free online tax filing for 2011 You were a 5% owner if you owned (or are considered to have owned) more than 5% of your employer's outstanding stock, outstanding voting stock, or capital or profits interest. Free online tax filing for 2011   If you file a joint return, do not count your spouse's personal services to determine whether you met the preceding requirements. Free online tax filing for 2011 However, you can count your spouse's participation in an activity in determining if you materially participated. Free online tax filing for 2011 Real property trades or businesses. Free online tax filing for 2011   A real property trade or business is a trade or business that does any of the following with real property. Free online tax filing for 2011 Develops or redevelops it. Free online tax filing for 2011 Constructs or reconstructs it. Free online tax filing for 2011 Acquires it. Free online tax filing for 2011 Converts it. Free online tax filing for 2011 Rents or leases it. Free online tax filing for 2011 Operates or manages it. Free online tax filing for 2011 Brokers it. Free online tax filing for 2011 Closely held corporations. Free online tax filing for 2011   A closely held corporation can qualify as a real estate professional if more than 50% of the gross receipts for its tax year came from real property trades or businesses in which it materially participated. Free online tax filing for 2011 Passive Activity Income and Deductions In figuring your net income or loss from a passive activity, take into account only passive activity income and passive activity deductions. Free online tax filing for 2011 Self-charged interest. Free online tax filing for 2011   Certain self-charged interest income or deductions may be treated as passive activity gross income or passive activity deductions if the loan proceeds are used in a passive activity. Free online tax filing for 2011   Generally, self-charged interest income and deductions result from loans between you and a partnership or S corporation in which you had a direct or indirect ownership interest. Free online tax filing for 2011 This includes both loans you made to the partnership or S corporation and loans the partnership or S corporation made to you. Free online tax filing for 2011   It also includes loans from one partnership or S corporation to another partnership or S corporation if each owner in the borrowing entity has the same proportional ownership interest in the lending entity. Free online tax filing for 2011    Exception. Free online tax filing for 2011 The self-charged interest rules do not apply to your interest in a partnership or S corporation if the entity made an election under Regulations section 1. Free online tax filing for 2011 469-7(g) to avoid the application of these rules. Free online tax filing for 2011 For more details on the self-charged interest rules, see Regulations section 1. Free online tax filing for 2011 469-7. Free online tax filing for 2011 Passive Activity Income Passive activity income includes all income from passive activities and generally includes gain from disposition of an interest in a passive activity or property used in a passive activity. Free online tax filing for 2011 Passive activity income does not include the following items. Free online tax filing for 2011 Income from an activity that is not a passive activity. Free online tax filing for 2011 These activities are discussed under Activities That Are Not Passive Activities , earlier. Free online tax filing for 2011 Portfolio income. Free online tax filing for 2011 This includes interest, dividends, annuities, and royalties not derived in the ordinary course of a trade or business. Free online tax filing for 2011 It includes gain or loss from the disposition of property that produces these types of income or that is held for investment. Free online tax filing for 2011 The exclusion for portfolio income does not apply to self-charged interest treated as passive activity income. Free online tax filing for 2011 For more information on self-charged interest, see Self-charged interest , earlier. Free online tax filing for 2011 Personal service income. Free online tax filing for 2011 This includes salaries, wages, commissions, self-employment income from trade or business activities in which you materially participated, deferred compensation, taxable social security and other retirement benefits, and payments from partnerships to partners for personal services. Free online tax filing for 2011 Income from positive section 481 adjustments allocated to activities other than passive activities. Free online tax filing for 2011 (Section 481 adjustments are adjustments that must be made due to changes in your accounting method. Free online tax filing for 2011 ) Income or gain from investments of working capital. Free online tax filing for 2011 Income from an oil or gas property if you treated any loss from a working interest in the property for any tax year beginning after 1986 as a nonpassive loss, as discussed in item (2) under Activities That Are Not Passive Activities , earlier. Free online tax filing for 2011 This also applies to income from other oil and gas property the basis of which is determined wholly or partly by the basis of the property in the preceding sentence. Free online tax filing for 2011 Any income from intangible property, such as a patent, copyright, or literary, musical, or artistic composition, if your personal efforts significantly contributed to the creation of the property. Free online tax filing for 2011 Any other income that must be treated as nonpassive income. Free online tax filing for 2011 See Recharacterization of Passive Income , later. Free online tax filing for 2011 Overall gain from any interest in a publicly traded partnership. Free online tax filing for 2011 See Publicly Traded Partnerships (PTPs) in the instructions for Form 8582. Free online tax filing for 2011 State, local, and foreign income tax refunds. Free online tax filing for 2011 Income from a covenant not to compete. Free online tax filing for 2011 Reimbursement of a casualty or theft loss included in gross income to recover all or part of a prior year loss deduction, if the loss deduction was not a passive activity deduction. Free online tax filing for 2011 Alaska Permanent Fund dividends. Free online tax filing for 2011 Cancellation of debt income, if at the time the debt is discharged the debt is not allocated to passive activities under the interest expense allocation rules. Free online tax filing for 2011 See chapter 4 of Publication 535, Business Expenses, for information about the rules for allocating interest. Free online tax filing for 2011 Disposition of property interests. Free online tax filing for 2011   Gain on the disposition of an interest in property generally is passive activity income if, at the time of the disposition, the property was used in an activity that was a passive activity in the year of disposition. Free online tax filing for 2011 The gain generally is not passive activity income if, at the time of disposition, the property was used in an activity that was not a passive activity in the year of disposition. Free online tax filing for 2011 An exception to this general rule may apply if you previously used the property in a different activity. Free online tax filing for 2011 Exception for more than one use in the preceding 12 months. Free online tax filing for 2011   If you used the property in more than one activity during the 12-month period before its disposition, you must allocate the gain between the activities on a basis that reasonably reflects the property's use during that period. Free online tax filing for 2011 Any gain allocated to a passive activity is passive activity income. Free online tax filing for 2011   For this purpose, an allocation of the gain solely to the activity in which the property was mainly used during that period reasonably reflects the property's use if the fair market value of your interest in the property is not more than the lesser of: $10,000, or 10% of the total of the fair market value of your interest in the property and the fair market value of all other property used in that activity immediately before the disposition. Free online tax filing for 2011 Exception for substantially appreciated property. Free online tax filing for 2011   The gain is passive activity income if the fair market value of the property at disposition was more than 120% of its adjusted basis and either of the following conditions applies. Free online tax filing for 2011 You used the property in a passive activity for 20% of the time you held your interest in the property. Free online tax filing for 2011 You used the property in a passive activity for the entire 24-month period before its disposition. Free online tax filing for 2011 If neither condition applies, the gain is not passive activity income. Free online tax filing for 2011 However, it is treated as portfolio income only if you held the property for investment for more than half of the time you held it in nonpassive activities. Free online tax filing for 2011   For this purpose, treat property you held through a corporation (other than an S corporation) or other entity whose owners receive only portfolio income as property held in a nonpassive activity and as property held for investment. Free online tax filing for 2011 Also, treat the date you agree to transfer your interest for a fixed or determinable amount as the disposition date. Free online tax filing for 2011   If you used the property in more than one activity during the 12-month period before its disposition, this exception applies only to the part of the gain allocated to a passive activity under the rules described in the preceding discussion. Free online tax filing for 2011 Disposition of property converted to inventory. Free online tax filing for 2011   If you disposed of property that you had converted to inventory from its use in another activity (for example, you sold condominium units you previously held for use in a rental activity), a special rule may apply. Free online tax filing for 2011 Under this rule, you disregard the property's use as inventory and treat it as if it were still used in that other activity at the time of disposition. Free online tax filing for 2011 This rule applies only if you meet all of the following conditions. Free online tax filing for 2011 At the time of disposition, you held your interest in the property in a dealing activity (an activity that involves holding the property or similar property mainly for sale to customers in the ordinary course of a trade or business). Free online tax filing for 2011 Your other activities included a nondealing activity (an activity that does not involve holding similar property for sale to customers in the ordinary course of a trade or business) in which you used the property for more than 80% of the period you held it. Free online tax filing for 2011 You did not acquire or hold your interest in the property for the main purpose of selling it to customers in the ordinary course of a trade or business. Free online tax filing for 2011 Passive Activity Deductions Generally, a deduction is a passive activity deduction for a taxable year if and only if such deduction either: Arises in connection with the conduct of an activity that is a passive activity for the tax year; or Is treated as a deduction from an activity for the tax year because it was disallowed by the passive activity rules in the preceding year and carried forward to the tax year. Free online tax filing for 2011 For purposes of item (1), above, an item of deduction arises in the taxable year in which the item would be allowable as a deduction under the taxpayer's method of accounting if taxable income for all taxable years were determined without regard to the passive activity rules and without regard to the basis, excess farm loss, and at-risk limits. Free online tax filing for 2011 See Coordination with other limitations on deductions that apply before the passive activity rules , later. Free online tax filing for 2011 Passive activity deductions generally include losses from dispositions of property used in a passive activity at the time of the disposition and losses from a disposition of less than your entire interest in a passive activity. Free online tax filing for 2011 Exceptions. Free online tax filing for 2011   Passive activity deductions do not include the following items. Free online tax filing for 2011 Deductions for expenses (other than interest expense) that are clearly and directly allocable to portfolio income. Free online tax filing for 2011 Qualified home mortgage interest, capitalized interest expenses, and other interest expenses (other than self-charged interest) properly allocable to passive activities. Free online tax filing for 2011 For more information on self-charged interest, see Self-charged interest under Passive Activity Income and Deductions, earlier. Free online tax filing for 2011 Losses from dispositions of property that produce portfolio income or property held for investment. Free online tax filing for 2011 State, local, and foreign income taxes. Free online tax filing for 2011 Miscellaneous itemized deductions that may be disallowed because of the 2%-of-adjusted-gross-income limit. Free online tax filing for 2011 Charitable contribution deductions. Free online tax filing for 2011 Net operating loss deductions. Free online tax filing for 2011 Percentage depletion carryovers for oil and gas wells. Free online tax filing for 2011 Capital loss carrybacks and carryovers. Free online tax filing for 2011 Items of deduction from a passive activity that are disallowed under the limits on deductions that apply before the passive activity rules. Free online tax filing for 2011 See Coordination with other limitations on deductions that apply before the passive activity rules , later. Free online tax filing for 2011 Deductions and losses that would have been allowed for tax years beginning before 1987 but for basis or at-risk limits. Free online tax filing for 2011 Net negative section 481 adjustments allocated to activities other than passive activities. Free online tax filing for 2011 (Section 481 adjustments are adjustments required due to changes in accounting methods. Free online tax filing for 2011 ) Casualty and theft losses, unless losses similar in cause and severity recur regularly in the activity. Free online tax filing for 2011 The deduction for the employer-equivalent portion of self-employment tax. Free online tax filing for 2011 Coordination with other limitations on deductions that apply before the passive activity rules. Free online tax filing for 2011   An item of deduction from a passive activity that is disallowed for a tax year under the basis or at-risk limitations is not a passive activity deduction for the tax year. Free online tax filing for 2011 The following sections provide rules for figuring the extent to which items of deduction from a passive activity are disallowed for a tax year under the basis or at-risk limitations. Free online tax filing for 2011 Proration of deductions disallowed under basis limitations. Free online tax filing for 2011   If any amount of your distributive share of a partnership's loss for the tax year is disallowed under the basis limitation, a ratable portion of your distributive share of each item of deduction or loss of the partnership is disallowed for the tax year. Free online tax filing for 2011 For this purpose, the ratable portion of an item of deduction or loss is the amount of such item multiplied by the fraction obtained by dividing: The amount of your distributive share of partnership loss that is disallowed for the taxable year; by The sum of your distributive shares of all items of deduction and loss of the partnership for the tax year. Free online tax filing for 2011   If any amount of your pro rata share of an S corporation's loss for the tax year is disallowed under the basis limitation, a ratable portion of your pro rata share of each item of deduction or loss of the S corporation is disallowed for the tax year. Free online tax filing for 2011 For this purpose, the ratable portion of an item of deduction or loss is the amount of such item multiplied by the fraction obtained by dividing: The amount of your share of S corporation loss that is disallowed for the tax year; by The sum of your pro rata shares of all items of deduction and loss of the corporation for the tax year. Free online tax filing for 2011 Proration of deductions disallowed under at-risk limitation. Free online tax filing for 2011   If any amount of your loss from an activity (as defined in Activities Covered by the At-Risk Rules , later) is disallowed under the at-risk rules for the tax year, a ratable portion of each item of deduction or loss from the activity is disallowed for the tax year. Free online tax filing for 2011 For this purpose, the ratable portion of an item of deduction or loss is the amount of such item multiplied by the fraction obtained by dividing: The amount of the loss from the activity that is disallowed for the tax year; by The sum of all deductions from the activity for the taxable year. Free online tax filing for 2011 Coordination of basis and at-risk limitations. Free online tax filing for 2011   The portion of any item of deduction or loss that is disallowed for the tax year under the basis limitations is not taken into account for the taxable year in determining the loss from an activity (as defined in Activities Covered by the At-Risk Rules , later) for purposes of applying the at-risk rules. Free online tax filing for 2011 Separately identified items of deduction and loss. Free online tax filing for 2011   In identifying the items of deduction and loss from an activity that are not disallowed under the basis and at-risk limitations (and that therefore may be treated as passive activity deductions), you need not account separately for any item of deduction or loss unless such item may, if separately taken into account, result in an income tax liability different from that which would result were such item of deduction or loss taken into account separately. Free online tax filing for 2011   Items of deduction or loss that must be accounted for separately include (but are not limited to) items of deduction or loss that: Are attributable to separate activities. Free online tax filing for 2011 See Grouping Your Activities , later. Free online tax filing for 2011 Arise in a rental real estate activity in tax years in which you actively participate in such activity; Arise in a rental real estate activity in taxable years in which you do not actively participate in such activity; Arose in a taxable year beginning before 1987 and were not allowed for such taxable year under the basis or at-risk limitations; Are taken into account under section 613A(d) (relating to limitations on certain depletion deductions); Are taken into account under section 1211 (relating to the limitation on capital losses); Are taken into account under section 1231 (relating to property used in a trade or business and involuntary conversions). Free online tax filing for 2011 See Section 1231 Gains and Losses in Publication 544 for more information. Free online tax filing for 2011 Are attributable to pre-enactment interests in activities. Free online tax filing for 2011 See Regulations section 1. Free online tax filing for 2011 469-11T(c). Free online tax filing for 2011 Grouping Your Activities You can treat one or more trade or business activities, or rental activities, as a single activity if those activities form an appropriate economic unit for measuring gain or loss under the passive activity rules. Free online tax filing for 2011 Grouping is important for a number of reasons. Free online tax filing for 2011 If you group two activities into one larger activity, you need only show material participation in the activity as a whole. Free online tax filing for 2011 But if the two activities are separate, you must show material participation in each one. Free online tax filing for 2011 On the other hand, if you group two activities into one larger activity and you dispose of one of the two, then you have disposed of only part of your entire interest in the activity. Free online tax filing for 2011 But if the two activities are separate and you dispose of one of them, then you have disposed of your entire interest in that activity. Free online tax filing for 2011 Grouping can also be important in determining whether you meet the 10% ownership requirement for actively participating in a rental real estate activity. Free online tax filing for 2011 Appropriate Economic Units Generally, to determine if activities form an appropriate economic unit, you must consider all the relevant facts and circumstances. Free online tax filing for 2011 You can use any reasonable method of applying the relevant facts and circumstances in grouping activities. Free online tax filing for 2011 The following factors have the greatest weight in determining whether activities form an appropriate economic unit. Free online tax filing for 2011 All of the factors do not have to apply to treat more than one activity as a single activity. Free online tax filing for 2011 The factors that you should consider are: The similarities and differences in the types of trades or businesses, The extent of common control, The extent of common ownership, The geographical location, and The interdependencies between or among activities, which may include the extent to which the activities: Buy or sell goods between or among themselves, Involve products or services that are generally provided together, Have the same customers, Have the same employees, or Use a single set of books and records to account for the activities. Free online tax filing for 2011 Example 1. Free online tax filing for 2011 John Jackson owns a bakery and a movie theater at a shopping mall in Baltimore and a bakery and movie theater in Philadelphia. Free online tax filing for 2011 Based on all the relevant facts and circumstances, there may be more than one reasonable method for grouping John's activities. Free online tax filing for 2011 For example, John may be able to group the movie theaters and the bakeries into: One activity, A movie theater activity and a bakery activity, A Baltimore activity and a Philadelphia activity, or Four separate activities. Free online tax filing for 2011 Example 2. Free online tax filing for 2011 Betty is a partner in ABC partnership, which sells nonfood items to grocery stores. Free online tax filing for 2011 Betty is also a partner in DEF (a trucking business). Free online tax filing for 2011 ABC and DEF are under common control. Free online tax filing for 2011 The main part of DEF's business is transporting goods for ABC. Free online tax filing for 2011 DEF is the only trucking business in which Betty is involved. Free online tax filing for 2011 Based on the rules of this section, Betty treats ABC's wholesale activity and DEF's trucking activity as a single activity. Free online tax filing for 2011 Consistency and disclosure requirement. Free online tax filing for 2011   Generally, when you group activities into appropriate economic units, you may not regroup those activities in a later tax year. Free online tax filing for 2011 You must meet any disclosure requirements of the IRS when you first group your activities and when you add or dispose of any activities in your groupings. Free online tax filing for 2011   However, if the original grouping is clearly inappropriate or there is a material change in the facts and circumstances that makes the original grouping clearly inappropriate, you must regroup the activities and comply with any disclosure requirements of the IRS. Free online tax filing for 2011   See Disclosure Requirement , later. Free online tax filing for 2011 Regrouping by the IRS. Free online tax filing for 2011   If any of the activities resulting from your grouping is not an appropriate economic unit and one of the primary purposes of your grouping (or failure to regroup) is to avoid the passive activity rules, the IRS may regroup your activities. Free online tax filing for 2011 Rental activities. Free online tax filing for 2011   In general, you cannot group a rental activity with a trade or business activity. Free online tax filing for 2011 However, you can group them together if the activities form an appropriate economic unit and: The rental activity is insubstantial in relation to the trade or business activity, The trade or business activity is insubstantial in relation to the rental activity, or Each owner of the trade or business activity has the same ownership interest in the rental activity, in which case the part of the rental activity that involves the rental of items of property for use in the trade or business activity may be grouped with the trade or business activity. Free online tax filing for 2011 Example. Free online tax filing for 2011 Herbert and Wilma are married and file a joint return. Free online tax filing for 2011 Healthy Food, an S corporation, is a grocery store business. Free online tax filing for 2011 Herbert is Healthy Food's only shareholder. Free online tax filing for 2011 Plum Tower, an S corporation, owns and rents out the building. Free online tax filing for 2011 Wilma is Plum Tower's only shareholder. Free online tax filing for 2011 Plum Tower rents part of its building to Healthy Food. Free online tax filing for 2011 Plum Tower's grocery store rental business and Healthy Food's grocery business are not insubstantial in relation to each other. Free online tax filing for 2011 Herbert and Wilma file a joint return, so they are treated as one taxpayer for purposes of the passive activity rules. Free online tax filing for 2011 The same owner (Herbert and Wilma) owns both Healthy Food and Plum Tower with the same ownership interest (100% in each). Free online tax filing for 2011 If the grouping forms an appropriate economic unit, as discussed earlier, Herbert and Wilma can group Plum Tower's grocery store rental and Healthy Food's grocery business into a single trade or business activity. Free online tax filing for 2011 Grouping of real and personal property rentals. Free online tax filing for 2011   In general, you cannot treat an activity involving the rental of real property and an activity involving the rental of personal property as a single activity. Free online tax filing for 2011 However, you can treat them as a single activity if you provide the personal property in connection with the real property or the real property in connection with the personal property. Free online tax filing for 2011 Certain activities may not be grouped. Free online tax filing for 2011   In general, if you own an interest as a limited partner or a limited entrepreneur in one of the following activities, you may not group that activity with any other activity in another type of business. Free online tax filing for 2011 Holding, producing, or distributing motion picture films or video tapes. Free online tax filing for 2011 Farming. Free online tax filing for 2011 Leasing any section 1245 property (as defined in section 1245(a)(3) of the Internal Revenue Code). Free online tax filing for 2011 For a list of section 1245 property, see Section 1245 property under Activities Covered by the At-Risk Rules , later. Free online tax filing for 2011 Exploring for, or exploiting, oil and gas resources. Free online tax filing for 2011 Exploring for, or exploiting, geothermal deposits. Free online tax filing for 2011   If you own an interest as a limited partner or a limited entrepreneur in an activity described in the list above, you may group that activity with another activity in the same type of business if the grouping forms an appropriate economic unit as discussed earlier. Free online tax filing for 2011 Limited entrepreneur. Free online tax filing for 2011   A limited entrepreneur is a person who: Has an interest in an enterprise other than as a limited partner, and Does not actively participate in the management of the enterprise. Free online tax filing for 2011 Activities conducted through another entity. Free online tax filing for 2011   A personal service corporation, closely held corporation, partnership, or S corporation must group its activities using the rules discussed in this section. Free online tax filing for 2011 Once the entity groups its activities, you, as the partner or shareholder of the entity, may group those activities (following the rules of this section): With each other, With activities conducted directly by you, or With activities conducted through other entities. Free online tax filing for 2011    You may not treat activities grouped together by the entity as separate activities. Free online tax filing for 2011 Personal service and closely held corporations. Free online tax filing for 2011   You may group an activity conducted through a personal service or closely held corporation with your other activities only to determine whether you materially or significantly participated in those other activities. Free online tax filing for 2011 See Material Participation , earlier, and Significant Participation Passive Activities , later. Free online tax filing for 2011 Publicly traded partnership (PTP). Free online tax filing for 2011   You may not group activities conducted through a PTP with any other activity, including an activity conducted through another PTP. Free online tax filing for 2011 Partial dispositions. Free online tax filing for 2011   If you dispose of substantially all of an activity during your tax year, you may treat the part disposed of as a separate activity. Free online tax filing for 2011 However, you can do this only if you can show with reasonable certainty: The amount of deductions and credits disallowed in prior years under the passive activity rules that is allocable to the part of the activity disposed of, and The amount of gross income and any other deductions and credits for the current tax year that is allocable to the part of the activity disposed of. Free online tax filing for 2011 Disclosure Requirement For tax years beginning after January 24, 2010, the following disclosure requirements for groupings apply. Free online tax filing for 2011 You are required to report certain changes to your groupings that occur during the tax year to the IRS. Free online tax filing for 2011 If you fail to report these changes, each trade or business activity or rental activity will be treated as a separate activity. Free online tax filing for 2011 You will be considered to have made a timely disclosure if you filed all affected income tax returns consistent with the claimed grouping and make the required disclosure on the income tax return for the year in which you first discovered the failure to disclose. Free online tax filing for 2011 If the IRS discovered the failure to disclose, you must have reasonable cause for not making the required disclosure. Free online tax filing for 2011 New grouping. Free online tax filing for 2011   You must file a written statement with your original income tax return for the first tax year in which two or more activities are originally grouped into a single activity. Free online tax filing for 2011 The statement must provide the names, addresses, and employer identification numbers (EINs), if applicable, for the activities being grouped as a single activity. Free online tax filing for 2011 In addition, the statement must contain a declaration that the grouped activities make up an appropriate economic unit for the measurement of gain or loss under the passive activity rules. Free online tax filing for 2011 Addition to an existing grouping. Free online tax filing for 2011   You must file a written statement with your original income tax return for the tax year in which you add a new activity to an existing group. Free online tax filing for 2011 The statement must provide the name, address, and EIN, if applicable, for the activity that is being added and for the activities in the existing group. Free online tax filing for 2011 In addition, the statement must contain a declaration that the activities make up an appropriate economic unit for the measurement of gain or loss under the passive activity rules. Free online tax filing for 2011 Regrouping. Free online tax filing for 2011   You must file a written statement with your original income tax return for the tax year in which you regroup the activities. Free online tax filing for 2011 The statement must provide the names, addresses, and EINs, if applicable, for the activities that are being regrouped. Free online tax filing for 2011 If two or more activities are being regrouped into a single activity, the statement must contain a declaration that the regrouped activities make up an appropriate economic unit for the measurement of gain or loss under the passive activity rules. Free online tax filing for 2011 In addition, the statement must contain an explanation of the material change in the facts and circumstances that made the original grouping clearly inappropriate. Free online tax filing for 2011 Groupings by partnerships and S corporations. Free online tax filing for 2011   Partnerships and S corporations are not subject to the rules for new grouping, addition to an existing grouping, or regrouping. Free online tax filing for 2011 Instead, they must comply with the disclosure instructions for grouping activities provided in their Form 1065, U. Free online tax filing for 2011 S. Free online tax filing for 2011 Return of Partnership Income, or Form 1120S, U. Free online tax filing for 2011 S. Free online tax filing for 2011 Income Tax Return for an S Corporation, whichever is applicable. Free online tax filing for 2011   The partner or shareholder is not required to make a separate disclosure of the groupings disclosed by the entity unless the partner or shareholder: Groups together any of the activities that the entity does not group together, Groups the entity's activities with activities conducted directly by the partner or shareholder, or Groups an entity's activities with activities conducted through another entity. Free online tax filing for 2011   A partner or shareholder may not treat activities grouped together by the entity as separate activities. Free online tax filing for 2011 Recharacterization of Passive Income Net income from the following passive activities may have to be recharacterized and excluded from passive activity income. Free online tax filing for 2011 Significant participation passive activities, Rental of property when less than 30% of the unadjusted basis of the property is subject to depreciation, Equity-financed lending activities, Rental of property incidental to development activities, Rental of property to nonpassive activities, and Licensing of intangible property by  pass-through entities. Free online tax filing for 2011 If you are engaged in or have an interest in one of these activities during the tax year (either directly or through a partnership or an S corporation), combine the income and losses from the activity to determine if you have a net loss or net income from that activity. Free online tax filing for 2011 If the result is a net loss, treat the income and losses the same as any other income or losses from that type of passive activity (trade or business activity or rental activity). Free online tax filing for 2011 If the result is net income, do not enter any of the income or losses from the activity or property on Form 8582 or its worksheets. Free online tax filing for 2011 Instead, enter income or losses on the form and schedules you normally use. Free online tax filing for 2011 However, see Significant Participation Passive Activities , later, if the activity is a significant participation passive activity and you also have a net loss from a different significant participation passive activity. Free online tax filing for 2011 Limit on recharacterized passive income. Free online tax filing for 2011   The total amount that you treat as nonpassive income under the rules described later in this discussion for significant participation passive activities, rental of nondepreciable property, and equity-financed lending activities cannot exceed the greatest amount that you treat as nonpassive income under any one of these rules. Free online tax filing for 2011 Investment income and investment expense. Free online tax filing for 2011   To figure your investment interest expense limitation on Form 4952, treat as investment income any net passive income recharacterized as nonpassive income from rental of nondepreciable property, equity-financed lending activity, or licensing of intangible property by a pass-through entity. Free online tax filing for 2011 Significant Participation Passive Activities A significant participation passive activity is any trade or business activity in which you participated for more than 100 hours during the tax year but did not materially participate. Free online tax filing for 2011 If your gross income from all significant participation passive activities is more than your deductions from those activities, a part of your net income from each significant participation passive activity is treated as nonpassive income. Free online tax filing for 2011 Corporations. Free online tax filing for 2011   An activity of a personal service corporation or closely held corporation is a significant participation passive activity if both of the following statements are true. Free online tax filing for 2011 The corporation is not treated as materially participating in the activity for the year. Free online tax filing for 2011 One or more individuals, each of whom is treated as significantly participating in the activity, directly or indirectly hold (in total) more than 50% (by value) of the corporation's outstanding stock. Free online tax filing for 2011 Worksheet A. Free online tax filing for 2011   Complete Worksheet A. Free online tax filing for 2011 Significant Participation Passive Activities , below, if you have income or losses from any significant participation activity. Free online tax filing for 2011 Begin by entering the name of each activity in the left column. Free online tax filing for 2011 Column (a). Free online tax filing for 2011   Enter the number of hours you participated in each activity and total the column. Free online tax filing for 2011   If the total is more than 500, do not complete Worksheet A or B. Free online tax filing for 2011 None of the activities are passive activities because you satisfy test 4 for material participation. Free online tax filing for 2011 (See Material participation tests , earlier. Free online tax filing for 2011 ) Report all the income and losses from these activities on the forms and schedules you normally use. Free online tax filing for 2011 Do not include the income and losses on Form 8582. Free online tax filing for 2011 Column (b). Free online tax filing for 2011   Enter the net loss, if any, from the activity. Free online tax filing for 2011 Net loss from an activity means either: The activity's current year net loss (if any) plus prior year unallowed losses (if any), or The excess of prior year unallowed losses over the current year net income (if any). Free online tax filing for 2011 Enter -0- here if the prior year unallowed loss is the same as the current year net income. Free online tax filing for 2011 Column (c). Free online tax filing for 2011   Enter net income (if any) from the activity. Free online tax filing for 2011 Net income means the excess of the current year's net income from the activity over any prior year unallowed losses from the activity. Free online tax filing for 2011 Column (d). Free online tax filing for 2011   Combine amounts in the Totals row for columns (b) and (c) and enter the total net income or net loss in the Totals row of column (d). Free online tax filing for 2011 If column (d) is a net loss, skip Worksheet B, Significant Participation Activities With Net Income. Free online tax filing for 2011 Include the income and losses in Worksheet 3 of Form 8582 (or Worksheet 2 in the Form 88