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H And R Block Free Tax

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H And R Block Free Tax

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

H and r block free tax 11. H and r block free tax   Employer-Provided Educational Assistance Table of Contents Introduction Working condition fringe benefit. H and r block free tax Introduction If you receive educational assistance benefits from your employer under an educational assistance program, you can exclude up to $5,250 of those benefits each year. H and r block free tax This means your employer should not include those benefits with your wages, tips, and other compensation shown in box 1 of your Form W-2. H and r block free tax This also means that you do not have to include the benefits on your income tax return. H and r block free tax You cannot use any of the tax-free education expenses paid for by your employer as the basis for any other deduction or credit, including the American opportunity credit and lifetime learning credit. H and r block free tax Educational assistance program. H and r block free tax   To qualify as an educational assistance program, the plan must be written and must meet certain other requirements. H and r block free tax Your employer can tell you whether there is a qualified program where you work. H and r block free tax Educational assistance benefits. H and r block free tax   Tax-free educational assistance benefits include payments for tuition, fees and similar expenses, books, supplies, and equipment. H and r block free tax Education generally includes any form of instruction or training that improves or develops your capabilities. H and r block free tax The payments do not have to be for work-related courses or courses that are part of a degree program. H and r block free tax   Educational assistance benefits do not include payments for the following items. H and r block free tax Meals, lodging, or transportation. H and r block free tax Tools or supplies (other than textbooks) that you can keep after completing the course of instruction. H and r block free tax Courses involving sports, games, or hobbies unless they: Have a reasonable relationship to the business of your employer, or Are required as part of a degree program. H and r block free tax Benefits over $5,250. H and r block free tax   If your employer pays more than $5,250 in educational assistance benefits for you during the year, you must generally pay tax on the amount over $5,250. H and r block free tax Your employer should include in your wages (Form W-2, box 1) the amount that you must include in income. H and r block free tax Working condition fringe benefit. H and r block free tax    However, if the benefits over $5,250 also qualify as a working condition fringe benefit, your employer does not have to include them in your wages. H and r block free tax A working condition fringe benefit is a benefit which, had you paid for it, you could deduct as an employee business expense. H and r block free tax For more information on working condition fringe benefits, see Working Condition Benefits in chapter 2 of Publication 15-B, Employer's Tax Guide to Fringe Benefits. H and r block free tax Prev  Up  Next   Home   More Online Publications