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How To File 1040x Electronically

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How To File 1040x Electronically

How to file 1040x electronically 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. How to file 1040x electronically Adjustment for premium. How to file 1040x electronically Adjustment for acquisition premium. How to file 1040x electronically Adjustment for market discount. How to file 1040x electronically 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. How to file 1040x electronically “Original issue discount” is defined first. How to file 1040x electronically The other terms are listed alphabetically. How to file 1040x electronically Original issue discount (OID). How to file 1040x electronically   OID is a form of interest. How to file 1040x electronically 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). How to file 1040x electronically Zero coupon bonds and debt instruments that pay no stated interest until maturity are examples of debt instruments that have OID. How to file 1040x electronically Accrual period. How to file 1040x electronically   An accrual period is an interval of time used to measure OID. How to file 1040x electronically The length of an accrual period can be 6 months, a year, or some other period, depending on when the debt instrument was issued. How to file 1040x electronically Acquisition premium. How to file 1040x electronically   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. How to file 1040x electronically A debt instrument does not have acquisition premium, however, if the debt instrument was purchased at a premium. How to file 1040x electronically See Premium, later. How to file 1040x electronically Adjusted issue price. How to file 1040x electronically   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. How to file 1040x electronically In general, the adjusted issue price at the beginning of the debt instrument's first accrual period is its issue price. How to file 1040x electronically 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. How to file 1040x electronically Debt instrument. How to file 1040x electronically   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). How to file 1040x electronically It generally does not include an annuity contract. How to file 1040x electronically Issue price. How to file 1040x electronically   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. How to file 1040x electronically Market discount. How to file 1040x electronically   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. How to file 1040x electronically 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. How to file 1040x electronically The market discount is the difference between the issue price plus accrued OID and your adjusted basis. How to file 1040x electronically Premium. How to file 1040x electronically   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. How to file 1040x electronically The premium is the excess of the adjusted basis over the payable amounts. How to file 1040x electronically See Publication 550 for information on the tax treatment of bond premium. How to file 1040x electronically Qualified stated interest. How to file 1040x electronically   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. How to file 1040x electronically Stated redemption price at maturity. How to file 1040x electronically   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. How to file 1040x electronically Yield to maturity (YTM). How to file 1040x electronically   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. How to file 1040x electronically The YTM is generally shown on the face of the debt instrument or in the literature you receive from your broker. How to file 1040x electronically If you do not have this information, consult your broker, tax advisor, or the issuer. How to file 1040x electronically 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. How to file 1040x electronically 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. How to file 1040x electronically The OID amounts listed are figured without reference to the price or date at which you acquired the debt instrument. How to file 1040x electronically 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. How to file 1040x electronically The following discussions explain what information is contained in each section of the list. How to file 1040x electronically Section I. How to file 1040x electronically   This section contains publicly offered, long-term debt instruments. How to file 1040x electronically Section I-A: Corporate Debt Instruments Issued Before 1985. How to file 1040x electronically Section I-B: Corporate Debt Instruments Issued After 1984. How to file 1040x electronically Section I-C: Inflation-Indexed Debt Instruments. How to file 1040x electronically For each publicly offered debt instrument in Section I, the list contains the following information. How to file 1040x electronically The name of the issuer. How to file 1040x electronically The Committee on Uniform Security Identification Procedures (CUSIP) number. How to file 1040x electronically The issue date. How to file 1040x electronically The maturity date. How to file 1040x electronically The issue price expressed as a percent of principal or of stated redemption price at maturity. How to file 1040x electronically The annual stated or coupon interest rate. How to file 1040x electronically (This rate is shown as 0. How to file 1040x electronically 00 if no annual interest payments are provided. How to file 1040x electronically ) The yield to maturity will be added to Section I-B for bonds issued after December 31, 2006. How to file 1040x electronically The total OID accrued up to January 1 of a calendar year. How to file 1040x electronically (This information is not available for every instrument. How to file 1040x electronically ) 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. How to file 1040x electronically The total OID per $1,000 of principal or maturity value for a calendar year and a subsequent year. How to file 1040x electronically Section II. How to file 1040x electronically   This section contains stripped coupons and principal components of U. How to file 1040x electronically S. How to file 1040x electronically Treasury and Government-Sponsored Enterprise debt instruments. How to file 1040x electronically 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. How to file 1040x electronically This section also includes debt instruments backed by U. How to file 1040x electronically S. How to file 1040x electronically Treasury securities that represent ownership interests in those securities. How to file 1040x electronically   The obligations listed in Section II are arranged by maturity date. How to file 1040x electronically The amounts listed are the total OID for a calendar year per $1,000 of redemption price. How to file 1040x electronically Section III. How to file 1040x electronically   This section contains short-term discount obligations. How to file 1040x electronically Section III-A: Short-Term U. How to file 1040x electronically S. How to file 1040x electronically Treasury Bills. How to file 1040x electronically Section III-B: Federal Home Loan Banks. How to file 1040x electronically Section III-C: Federal National Mortgage Association. How to file 1040x electronically Section III-D: Federal Farm Credit Banks. How to file 1040x electronically Section III-E: Federal Home Loan Mortgage Corporation. How to file 1040x electronically Section III-F: Federal Agricultural Mortgage Corporation. How to file 1040x electronically    Information that supplements Section III-A is available on the Internet at http://www. How to file 1040x electronically treasurydirect. How to file 1040x electronically gov/tdhome. How to file 1040x electronically htm. How to file 1040x electronically   The short-term obligations listed in this section are arranged by maturity date. How to file 1040x electronically 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. How to file 1040x electronically 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. How to file 1040x electronically Debt Instruments Not on the OID List The list of debt instruments discussed earlier does not contain the following items. How to file 1040x electronically U. How to file 1040x electronically S. How to file 1040x electronically savings bonds. How to file 1040x electronically Certificates of deposit and other face-amount certificates issued at a discount, including syndicated certificates of deposit. How to file 1040x electronically Obligations issued by tax-exempt organizations. How to file 1040x electronically OID debt instruments that matured or were entirely called by the issuer before the tables were posted on the IRS website. How to file 1040x electronically Mortgage-backed securities and mortgage participation certificates. How to file 1040x electronically Long-term OID debt instruments issued before May 28, 1969. How to file 1040x electronically Short-term obligations, other than the obligations listed in Section III. How to file 1040x electronically Debt instruments issued at a discount by states or their political subdivisions. How to file 1040x electronically REMIC regular interests and CDOs. How to file 1040x electronically Commercial paper and banker's acceptances issued at a discount. How to file 1040x electronically Obligations issued at a discount by individuals. How to file 1040x electronically Foreign obligations not traded in the United States and obligations not issued in the United States. How to file 1040x electronically 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. How to file 1040x electronically 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. How to file 1040x electronically 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. How to file 1040x electronically See Backup Withholding, later. How to file 1040x electronically 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. How to file 1040x electronically 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). How to file 1040x electronically Electronic payee statements. How to file 1040x electronically   You can issue Form 1099-OID electronically with the consent of the recipient. How to file 1040x electronically More information. How to file 1040x electronically   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. How to file 1040x electronically 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. How to file 1040x electronically 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. How to file 1040x electronically If you sell the obligation for the owner before maturity, you must file Form 1099-B to reflect the gross proceeds to the seller. How to file 1040x electronically Do not report the accrued discount to the date of sale on either Form 1099-INT or Form 1099-OID. How to file 1040x electronically 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. How to file 1040x electronically A special rule is used to determine the original issue price for information reporting on U. How to file 1040x electronically S. How to file 1040x electronically Treasury bills (T-bills) listed in Section III-A. How to file 1040x electronically 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. How to file 1040x electronically This noncompetitive discount price is the issue price (expressed as a percent of principal) shown in Section III-A. How to file 1040x electronically 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. How to file 1040x electronically Example 1. How to file 1040x electronically There are 13-week and 26-week T-bills maturing on the same date as the T-bill being redeemed. How to file 1040x electronically The price actually paid by the owner cannot be established by owner or middleman records. How to file 1040x electronically 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. How to file 1040x electronically The interest you report on Form 1099-INT is the OID (per $1,000 of principal) shown in Section III-A for that obligation. How to file 1040x electronically 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. How to file 1040x electronically For this purpose, you can rely on Section I of the OID list to determine the following information. How to file 1040x electronically Whether a debt instrument has OID. How to file 1040x electronically The OID to be reported on the Form 1099-OID. How to file 1040x electronically In general, you must report OID on publicly offered, long-term debt instruments listed in Section I. How to file 1040x electronically You also can report OID on other long-term debt instruments. How to file 1040x electronically Form 1099-OID. How to file 1040x electronically   On Form 1099-OID for a calendar year show the following information. How to file 1040x electronically Box 1. How to file 1040x electronically The OID for the actual dates the owner held the debt instruments during a calendar year. How to file 1040x electronically To determine this amount, see Figuring OID, next. How to file 1040x electronically Box 2. How to file 1040x electronically The qualified stated interest paid or credited during the calendar year. How to file 1040x electronically Interest reported here is not reported on Form 1099-INT. How to file 1040x electronically The qualified stated interest on Treasury inflation-protected securities may be reported on Form 1099-INT in box 3 instead. How to file 1040x electronically Box 3. How to file 1040x electronically Any interest or principal forfeited because of an early withdrawal that the owner can deduct from gross income. How to file 1040x electronically Do not reduce the amounts in boxes 1 and 2 by the forfeiture. How to file 1040x electronically Box 4. How to file 1040x electronically Any backup withholding for this debt instrument. How to file 1040x electronically Box 7. How to file 1040x electronically The CUSIP number, if any. How to file 1040x electronically 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. How to file 1040x electronically 50 2006). How to file 1040x electronically If the issuer of the debt instrument is other than the payer, show the name of the issuer in this box. How to file 1040x electronically Box 8. How to file 1040x electronically The OID on a U. How to file 1040x electronically S. How to file 1040x electronically Treasury obligation for the part of the year the owner held the debt instrument. How to file 1040x electronically Box 9. How to file 1040x electronically Investment expenses passed on to holders of a single-class REMIC. How to file 1040x electronically Boxes 10-12. How to file 1040x electronically Use to report any state income tax withheld for this debt instrument. How to file 1040x electronically Figuring OID. How to file 1040x electronically   You can determine the OID on a long-term debt instrument by using either of the following. How to file 1040x electronically Section I of the OID list. How to file 1040x electronically The income tax regulations. How to file 1040x electronically Using Section I. How to file 1040x electronically   If the owner held the debt instrument for the entire calendar year, report the OID shown in Section I for the calendar year. How to file 1040x electronically 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. How to file 1040x electronically For example, if the debt instrument's stated redemption price at maturity is $500, report one-half the listed OID. How to file 1040x electronically   If the owner held the debt instrument for less than the entire calendar year, figure the OID to report as follows. How to file 1040x electronically Look up the daily OID for the first accrual period in the calendar year during which the owner held the debt instrument. How to file 1040x electronically Multiply the daily OID by the number of days the owner held the debt instrument during that accrual period. How to file 1040x electronically Repeat steps (1) and (2) for any remaining accrual periods for the year during which the owner held the debt instrument. How to file 1040x electronically Add the results in steps (2) and (3) to determine the owner's OID per $1,000 of stated redemption price at maturity. How to file 1040x electronically If necessary, adjust the OID in (4) to reflect the debt instrument's stated redemption price at maturity. How to file 1040x electronically Report the result on Form 1099-OID in box 1. How to file 1040x electronically Using the income tax regulations. How to file 1040x electronically   Instead of using Section I to figure OID, you can use the regulations under sections 1272 through 1275 of the Internal Revenue Code. How to file 1040x electronically 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. How to file 1040x electronically (If you use Section I-B, the OID is figured using 6-month accrual periods. How to file 1040x electronically )   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. How to file 1040x electronically 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. How to file 1040x electronically You must file an information return showing the reportable interest and OID, if any, on the CD. How to file 1040x electronically These rules apply whether or not you sold the CD to the owner. How to file 1040x electronically Report OID on a CD in the same way as OID on other debt instruments. How to file 1040x electronically See Short-Term Obligations Redeemed at Maturity and Long-Term Debt Instruments, earlier. How to file 1040x electronically 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. How to file 1040x electronically However, do not report the interest if either of the following apply. How to file 1040x electronically You hold the bond as a nominee for the true owner. How to file 1040x electronically The payee is a foreign person. How to file 1040x electronically See Payments to foreign person under Backup Withholding, later. How to file 1040x electronically 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. How to file 1040x electronically The coupon may have been “stripped” (separated) from the bond and separately purchased. How to file 1040x electronically 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. How to file 1040x electronically 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%. How to file 1040x electronically The backup withholding is deducted at the time a cash payment is made. How to file 1040x electronically See Pub. How to file 1040x electronically 1281, Backup Withholding for Missing and Incorrect Name/TIN(s), for more information. How to file 1040x electronically Backup withholding generally applies in the following situations. How to file 1040x electronically The payee does not give you a taxpayer identification number (TIN). How to file 1040x electronically The IRS notifies you that the payee gave an incorrect TIN. How to file 1040x electronically The IRS notifies you that the payee is subject to backup withholding due to payee underreporting. How to file 1040x electronically 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. How to file 1040x electronically However, for short-term discount obligations (other than government obligations), bearer bonds and coupons, and U. How to file 1040x electronically S. How to file 1040x electronically 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. How to file 1040x electronically Short-term obligations. How to file 1040x electronically   Backup withholding applies to OID on a short-term obligation only when the OID is paid at maturity. How to file 1040x electronically However, backup withholding applies to any interest payable before maturity when the interest is paid or credited. How to file 1040x electronically   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. How to file 1040x electronically 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. How to file 1040x electronically If the purchase price of a listed obligation is not established or is disregarded, you must use the issue price shown in Section III. How to file 1040x electronically Long-term obligations. How to file 1040x electronically   If no cash payments are made on a long-term obligation before maturity, backup withholding applies only at maturity. How to file 1040x electronically The amount subject to backup withholding is the OID includible in the owner's gross income for the calendar year when the obligation matures. How to file 1040x electronically The amount to be withheld is limited to the cash paid. How to file 1040x electronically Registered long-term obligations with cash payments. How to file 1040x electronically   If a registered long-term obligation has cash payments before maturity, backup withholding applies when a cash payment is made. How to file 1040x electronically 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. How to file 1040x electronically 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. How to file 1040x electronically For any payment, the required withholding is limited to the cash paid. How to file 1040x electronically Payee not the original owner. How to file 1040x electronically   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). How to file 1040x electronically The amount subject to backup withholding at maturity of a listed obligation must be determined using the issue price shown in Section I. How to file 1040x electronically Bearer long-term obligations with cash payments. How to file 1040x electronically   If a bearer long-term obligation has cash payments before maturity, backup withholding applies when the cash payments are made. How to file 1040x electronically 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. How to file 1040x electronically 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. How to file 1040x electronically The required withholding at maturity is limited to the cash paid. How to file 1040x electronically Sales and redemptions. How to file 1040x electronically   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. How to file 1040x electronically Backup withholding applies in the following situations. How to file 1040x electronically The payee does not give you a TIN. How to file 1040x electronically The IRS notifies you that the payee gave an incorrect TIN. How to file 1040x electronically 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. How to file 1040x electronically Payments outside the United States to U. How to file 1040x electronically S. How to file 1040x electronically person. How to file 1040x electronically   The requirements for backup withholding and information reporting apply to payments of OID and interest made outside the United States to a U. How to file 1040x electronically S. How to file 1040x electronically 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. How to file 1040x electronically S. How to file 1040x electronically trade or business. How to file 1040x electronically Payments to foreign person. How to file 1040x electronically   The following discussions explain the rules for backup withholding and information reporting on payments to foreign persons. How to file 1040x electronically U. How to file 1040x electronically S. How to file 1040x electronically -source amount. How to file 1040x electronically   Backup withholding and information reporting are not required for payments of U. How to file 1040x electronically S. How to file 1040x electronically -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. How to file 1040x electronically A U. How to file 1040x electronically S. How to file 1040x electronically resident is not a foreign person. How to file 1040x electronically 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. How to file 1040x electronically 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. How to file 1040x electronically S. How to file 1040x electronically person. How to file 1040x electronically   For information about the 28% withholding tax that may apply to payments of U. How to file 1040x electronically S. How to file 1040x electronically -source OID or interest to foreign persons, see Publication 515. How to file 1040x electronically Foreign-source amount. How to file 1040x electronically   Backup withholding and information reporting are not required for payments of foreign-source OID and interest made outside the United States. How to file 1040x electronically 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. How to file 1040x electronically More information. How to file 1040x electronically   For more information about backup withholding and information reporting on foreign-source amounts or payments to foreign persons, see Regulations section 1. How to file 1040x electronically 6049-5. How to file 1040x electronically Information for Owners of OID Debt Instruments This section is for persons who prepare their own tax returns. How to file 1040x electronically It discusses the income tax rules for figuring and reporting OID on long-term debt instruments. How to file 1040x electronically 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. How to file 1040x electronically However, the information provided does not cover every situation. How to file 1040x electronically More information can be found in the regulations under sections 1271 through 1275 of the Internal Revenue Code. How to file 1040x electronically Including OID in income. How to file 1040x electronically   Generally, you include OID in income as it accrues each year, whether or not you receive any payments from the debt instrument issuer. How to file 1040x electronically Exceptions. How to file 1040x electronically   The rules for including OID in income as it accrues generally do not apply to the following debt instruments. How to file 1040x electronically U. How to file 1040x electronically S. How to file 1040x electronically savings bonds. How to file 1040x electronically Tax-exempt obligations. How to file 1040x electronically (However, see Tax-Exempt Bonds and Coupons, later. How to file 1040x electronically ) Obligations issued by individuals before March 2, 1984. How to file 1040x electronically Loans of $10,000 or less between individuals who are not in the business of lending money. How to file 1040x electronically (The dollar limit includes outstanding prior loans by the lender to the borrower. How to file 1040x electronically ) This exception does not apply if a principal purpose of the loan is to avoid any federal tax. How to file 1040x electronically   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. How to file 1040x electronically Publication 550 also discusses rules for holders of REMIC interests and CDOs. How to file 1040x electronically De minimis rule. How to file 1040x electronically   You can treat OID as zero if the total OID on a debt instrument is less than one-fourth of 1% (. How to file 1040x electronically 0025) of the stated redemption price at maturity multiplied by the number of full years from the date of original issue to maturity. How to file 1040x electronically Debt instruments with de minimis OID are not listed in this publication. How to file 1040x electronically 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. How to file 1040x electronically Also, the de minimis rules generally do not apply to tax-exempt obligations. How to file 1040x electronically Example 2. How to file 1040x electronically 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. How to file 1040x electronically 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. How to file 1040x electronically Under the de minimis rule, you can treat the OID as zero because the $20 discount is less than $25. How to file 1040x electronically Example 3. How to file 1040x electronically Assume the same facts as Example 2, except the debt instrument was issued at $950. How to file 1040x electronically You must report part of the $50 OID each year because it is more than $25. How to file 1040x electronically Choice to report all interest as OID. How to file 1040x electronically   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. How to file 1040x electronically See Constant yield method under Debt Instruments Issued After 1984, later, for more information. How to file 1040x electronically   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. How to file 1040x electronically For more information, see Regulations section 1. How to file 1040x electronically 1272-3. How to file 1040x electronically Purchase after date of original issue. How to file 1040x electronically   A debt instrument you purchased after the date of original issue may have premium, acquisition premium, or market discount. How to file 1040x electronically If so, the OID reported to you on Form 1099-OID may have to be adjusted. How to file 1040x electronically For more information, see Showing an OID adjustment under How To Report OID, later. How to file 1040x electronically The following rules generally do not apply to contingent payment debt instruments. How to file 1040x electronically Adjustment for premium. How to file 1040x electronically   If your debt instrument (other than an inflation-indexed debt instrument) has premium, do not report any OID as ordinary income. How to file 1040x electronically Your adjustment is the total OID shown on your Form 1099-OID. How to file 1040x electronically Adjustment for acquisition premium. How to file 1040x electronically   If your debt instrument has acquisition premium, reduce the OID you report. How to file 1040x electronically 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. How to file 1040x electronically Adjustment for market discount. How to file 1040x electronically   If your debt instrument has market discount that you choose to include in income currently, increase the OID you report. How to file 1040x electronically Your adjustment is the accrued market discount for the year. How to file 1040x electronically 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. How to file 1040x electronically If you choose to use the constant yield method to figure accrued market discount, also see Figuring OID on Long-Term Debt Instruments, later. How to file 1040x electronically The constant yield method of figuring accrued OID, explained in those discussions under Constant yield method, is also used to figure accrued market discount. How to file 1040x electronically For more information concerning premium or market discount on an inflation-indexed debt instrument, see Regulations section 1. How to file 1040x electronically 1275-7. How to file 1040x electronically Sale, exchange, or redemption. How to file 1040x electronically   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. How to file 1040x electronically If you sold the debt instrument through a broker, you should receive Form 1099-B or an equivalent statement from the broker. How to file 1040x electronically Use the Form 1099-B or other statement and your brokerage statements to complete Form 8949, and Schedule D (Form 1040). How to file 1040x electronically   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. How to file 1040x electronically Your basis, generally, is your cost increased by the OID you have included in income each year you held it. How to file 1040x electronically 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. How to file 1040x electronically   See chapter 4 of Publication 550 for more information about the tax treatment of the sale or redemption of discounted debt instruments. How to file 1040x electronically Example 4. How to file 1040x electronically Larry, a calendar year taxpayer, bought a corporate debt instrument at original issue for $86,235. How to file 1040x electronically 00 on November 1 of Year 1. How to file 1040x electronically The 15-year debt instrument matures on October 31 of Year 16 at a stated redemption price of $100,000. How to file 1040x electronically The debt instrument provides for semiannual payments of interest at 10%. How to file 1040x electronically Assume the debt instrument is a capital asset in Larry's hands. How to file 1040x electronically The debt instrument has $13,765. How to file 1040x electronically 00 of OID ($100,000 stated redemption price at maturity minus $86,235. How to file 1040x electronically 00 issue price). How to file 1040x electronically Larry sold the debt instrument for $90,000 on November 1 of Year 4. How to file 1040x electronically Including the OID he will report for the period he held the debt instrument in Year 4, Larry has included $4,556. How to file 1040x electronically 00 of OID in income and has increased his basis by that amount to $90,791. How to file 1040x electronically 00. How to file 1040x electronically Larry has realized a loss of $791. How to file 1040x electronically 00. How to file 1040x electronically All of Larry's loss is capital loss. How to file 1040x electronically 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. How to file 1040x electronically Form 1099-OID shows all OID income in box 1 except OID on a U. How to file 1040x electronically S. How to file 1040x electronically Treasury obligation, which is shown in box 8. How to file 1040x electronically It also shows, in box 2, any qualified stated interest you must include in income. How to file 1040x electronically (However, any qualified stated interest on Treasury inflation-protected securities can be reported on Form 1099-INT in box 3. How to file 1040x electronically ) A copy of Form 1099-OID will be sent to the IRS. How to file 1040x electronically Do not attach your copy to your tax return. How to file 1040x electronically Keep it for your records. How to file 1040x electronically 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. How to file 1040x electronically 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. How to file 1040x electronically Form 1099-OID not received. How to file 1040x electronically   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. How to file 1040x electronically Refiguring OID. How to file 1040x electronically   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. How to file 1040x electronically You bought the debt instrument at a premium or at an acquisition premium. How to file 1040x electronically The debt instrument is a stripped bond or coupon (including zero coupon bonds backed by U. How to file 1040x electronically S. How to file 1040x electronically Treasury securities). How to file 1040x electronically The debt instrument is a contingent payment or inflation-indexed debt instrument. How to file 1040x electronically See the discussions under Figuring OID on Long-Term Debt Instruments or Figuring OID on Stripped Bonds and Coupons, later, for the specific computations. How to file 1040x electronically Refiguring interest. How to file 1040x electronically   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. How to file 1040x electronically Nominee. How to file 1040x electronically   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. How to file 1040x electronically ” You must file another Form 1099-OID for each actual owner, showing the OID for the owner. How to file 1040x electronically Show the owner of the debt instrument as the “recipient” and you as the “payer. How to file 1040x electronically ”   Complete Form 1099-OID and Form 1096 and file the forms with the Internal Revenue Service Center for your area. How to file 1040x electronically You must also give a copy of the Form 1099-OID to the actual owner. How to file 1040x electronically However, you are not required to file a nominee return to show amounts belonging to your spouse. How to file 1040x electronically See the Form 1099 instructions for more information. How to file 1040x electronically   When preparing your tax return, follow the instructions under Showing an OID adjustment in the next discussion. How to file 1040x electronically 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. How to file 1040x electronically Form 1040 or Form 1040A required. How to file 1040x electronically   You must use Form 1040 or Form 1040A (you cannot use Form 1040EZ) under either of the following conditions. How to file 1040x electronically You received a Form 1099-OID as a nominee for the actual owner. How to file 1040x electronically Your total interest and OID income for the year was more than $1,500. How to file 1040x electronically Form 1040 required. How to file 1040x electronically   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. How to file 1040x electronically 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. How to file 1040x electronically Also, you must use Form 1040 if you were charged an early withdrawal penalty. How to file 1040x electronically Where to report. How to file 1040x electronically   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. How to file 1040x electronically Include all OID and periodic interest shown on any Form 1099-OID, boxes 1, 2, and 8, you received for the tax year. How to file 1040x electronically Also include any other OID and interest income for which you did not receive a Form 1099. How to file 1040x electronically Showing an OID adjustment. How to file 1040x electronically   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. How to file 1040x electronically   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. How to file 1040x electronically If the OID, as adjusted, is less than the amount shown on Form 1099-OID, show the adjustment as follows. How to file 1040x electronically Under your last entry on line 1, subtotal all interest and OID income listed on line 1. How to file 1040x electronically Below the subtotal, write “Nominee Distribution” or “OID Adjustment” and show the OID you are not required to report. How to file 1040x electronically Subtract that OID from the subtotal and enter the result on line 2. How to file 1040x electronically If the OID, as adjusted, is more than the amount shown on Form 1099-OID, show the adjustment as follows. How to file 1040x electronically Under your last entry on line 1, subtotal all interest and OID income listed on line 1. How to file 1040x electronically Below the subtotal, write “OID Adjustment” and show the additional OID. How to file 1040x electronically Add that OID to the subtotal and enter the result on line 2. How to file 1040x electronically 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. How to file 1040x electronically It also may depend on the type of the debt instrument. How to file 1040x electronically There are different rules for each of the following debt instruments. How to file 1040x electronically Corporate debt instruments issued after 1954 and before May 28, 1969, and government debt instruments issued after 1954 and before July 2, 1982. How to file 1040x electronically Corporate debt instruments issued after May 27, 1969, and before July 2, 1982. How to file 1040x electronically Debt instruments issued after July 1, 1982, and before 1985. How to file 1040x electronically Debt instruments issued after 1984 (other than debt instruments described in (5) and (6)). How to file 1040x electronically Contingent payment debt instruments issued after August 12, 1996. How to file 1040x electronically Inflation-indexed debt instruments (including Treasury inflation-protected securities) issued after January 5, 1997. How to file 1040x electronically Zero coupon bonds. How to file 1040x electronically   The rules for figuring OID on zero coupon bonds backed by U. How to file 1040x electronically S. How to file 1040x electronically Treasury securities are discussed under Figuring OID on Stripped Bonds and Coupons, later. How to file 1040x electronically 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. How to file 1040x electronically The OID, which is taxed as ordinary income, generally equals the following amount. How to file 1040x electronically   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. How to file 1040x electronically If there is a loss on the sale of the debt instrument, the entire loss is a capital loss and no OID is reported. How to file 1040x electronically 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. How to file 1040x electronically For information about showing the correct OID on your tax return, see the discussion under How To Report OID, earlier. How to file 1040x electronically Your basis in the debt instrument is increased by the OID you include in income. How to file 1040x electronically Form 1099-OID. How to file 1040x electronically   You should receive a Form 1099-OID showing OID for the part of the year you held the debt instrument. How to file 1040x electronically However, if you paid an acquisition premium, you may need to refigure the OID to report on your tax return. How to file 1040x electronically See Reduction for acquisition premium, later. How to file 1040x electronically 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. How to file 1040x electronically irs. How to file 1040x electronically gov/pub1212 by clicking the link under Recent Developments. How to file 1040x electronically Form 1099-OID not received. How to file 1040x electronically    The OID listed is for each $1,000 of redemption price. How to file 1040x electronically You must adjust the listed amount if your debt instrument has a different principal amount. How to file 1040x electronically For example, if you have a debt instrument with a $500 principal amount, use one-half the listed amount to figure your OID. How to file 1040x electronically   If you held the debt instrument the entire year, use the OID shown in Section I-A for a calendar year. How to file 1040x electronically (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. How to file 1040x electronically ) If you did not hold the debt instrument the entire year, figure your OID using the following method. How to file 1040x electronically Divide the OID shown by 12. How to file 1040x electronically 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. How to file 1040x electronically This is the OID to include in income unless you paid an acquisition premium. How to file 1040x electronically The reduction for acquisition premium is discussed next. How to file 1040x electronically Reduction for acquisition premium. How to file 1040x electronically   If you bought the debt instrument at an acquisition premium, figure the OID to include in income as follows. How to file 1040x electronically 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. How to file 1040x electronically This is the monthly OID. How to file 1040x electronically Subtract from your cost the issue price and the accumulated OID from the date of issue to the date of purchase. How to file 1040x electronically (If the result is zero or less, stop here. How to file 1040x electronically You did not pay an acquisition premium. How to file 1040x electronically ) 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. How to file 1040x electronically Subtract the amount figured in (3) from the amount figured in (1). How to file 1040x electronically This is the OID to include in income for each month you hold the debt instrument during the year. How to file 1040x electronically Transfers during the month. How to file 1040x electronically   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. How to file 1040x electronically Your holding period for this purpose begins the day you acquire the debt instrument and ends the day before you dispose of it. How to file 1040x electronically 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. How to file 1040x electronically For information about showing the correct OID on your tax return, see How To Report OID, earlier. How to file 1040x electronically Form 1099-OID. How to file 1040x electronically   You should receive a Form 1099-OID showing OID for the part of the year you held the debt instrument. How to file 1040x electronically However, if you paid an acquisition premium, you may need to refigure the OID to report on your tax return. How to file 1040x electronically See Constant yield method and the discussions on acquisition premium that follow, later. How to file 1040x electronically 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. How to file 1040x electronically irs. How to file 1040x electronically gov/pub1212 by clicking the link under Recent Developments. How to file 1040x electronically Form 1099-OID not received. How to file 1040x electronically    The OID listed is for each $1,000 of redemption price. How to file 1040x electronically You must adjust the listed amount if your debt instrument has a different principal amount. How to file 1040x electronically For example, if you have a debt instrument with a $500 principal amount, use one-half the listed amount to figure your OID. How to file 1040x electronically   If you held the debt instrument the entire year, use the OID shown in Section I-A. How to file 1040x electronically (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. How to file 1040x electronically ) If you did not hold the debt instrument the entire year, figure your OID using either of the following methods. How to file 1040x electronically Method 1. How to file 1040x electronically    Divide the total OID for a calendar year by 365 (366 for leap years). How to file 1040x electronically Multiply the result in (1) by the number of days you held the debt instrument during that particular year. How to file 1040x electronically  This computation is an approximation and may result in a slightly higher OID than Method 2. How to file 1040x electronically Method 2. How to file 1040x electronically    Look up the daily OID for the first accrual period you held the debt instrument during a calendar year. How to file 1040x electronically (See Accrual period under Constant yield method, next. How to file 1040x electronically ) Multiply the daily OID by the number of days you held the debt instrument during that accrual period. How to file 1040x electronically If you held the debt instrument for part of both accrual periods, repeat (1) and (2) for the second accrual period. How to file 1040x electronically Add the results of (2) and (3). How to file 1040x electronically This is the OID to include in income, unless you paid an acquisition premium. How to file 1040x electronically (The reduction for acquisition premium is discussed later. How to file 1040x electronically ) Constant yield method. How to file 1040x electronically   This discussion shows how to figure OID on debt instruments issued after July 1, 1982, and before 1985, using a constant yield method. How to file 1040x electronically OID is allocated over the life of the debt instrument through adjustments to the issue price for each accrual period. How to file 1040x electronically   Figure the OID allocable to any accrual period as follows. How to file 1040x electronically Multiply the adjusted issue price at the beginning of the accrual period by the debt instrument's yield to maturity. How to file 1040x electronically Subtract from the result in (1) any qualified stated interest allocable to the accrual period. How to file 1040x electronically Accrual period. How to file 1040x electronically   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. How to file 1040x electronically Your tax year will usually include parts of two accrual periods. How to file 1040x electronically Daily OID. How to file 1040x electronically   The OID for any accrual period is allocated equally to each day in the accrual period. How to file 1040x electronically You must include in income the sum of the OID amounts for each day you hold the debt instrument during the year. How to file 1040x electronically If your tax year includes parts of two or more accrual periods, you must include the proper daily OID amounts for each accrual period. How to file 1040x electronically Figuring daily OID. How to file 1040x electronically   The daily OID for the initial accrual period is figured using the following formula. How to file 1040x electronically   (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. How to file 1040x electronically Reduction for acquisition premium on debt instruments purchased before July 19, 1984. How to file 1040x electronically   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. How to file 1040x electronically 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. How to file 1040x electronically Reduction for acquisition premium on debt instruments purchased after July 18, 1984. How to file 1040x electronically   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. How to file 1040x electronically However, the method of figuring the daily acquisition premium is different from the method described in the preceding discussion. How to file 1040x electronically To figure the daily acquisition premium under this method, multiply the daily OID by the following fraction. How to file 1040x electronically The numerator is the acquisition premium. How to file 1040x electronically The denominator is the total OID remaining for the debt instrument after your purchase date. How to file 1040x electronically Section I-A is available at www. How to file 1040x electronically irs. How to file 1040x electronically gov/pub1212 and clicking the link under Recent Developments. How to file 1040x electronically Using Section I-A to figure accumulated OID. How to file 1040x electronically   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. How to file 1040x electronically The amount from the “Total OID to January 1, YYYY” column for your debt instrument. How to file 1040x electronically The OID from January 1 of a calendar year to the date of purchase, figured as follows. How to file 1040x electronically 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. How to file 1040x electronically 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. How to file 1040x electronically Add the amounts figured in (2a) and (2b). How to file 1040x electronically 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. How to file 1040x electronically You must include the OID in gross income whether or not you hold the debt instrument as a capital asset. How to file 1040x electronically Your basis in the debt instrument is increased by the OID you include in income. How to file 1040x electronically For information about showing the correct OID on your tax return, see How To Report OID, earlier. How to file 1040x electronically Form 1099-OID. How to file 1040x electronically   You should receive a Form 1099-OID showing OID for the part of a calendar year you held the debt instrument. How to file 1040x electronically However, if you paid an acquisition premium, you may need to refigure the OID to report on your tax return. How to file 1040x electronically See Constant yield method and Reduction for acquisition premium, later. How to file 1040x electronically   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. How to file 1040x electronically See Contingent Payment Debt Instruments or Inflation-Indexed Debt Instruments, later. How to file 1040x electronically 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. How to file 1040x electronically irs. How to file 1040x electronically gov/pub1212 by clicking the link under Recent Developments. How to file 1040x electronically Form 1099-OID not received. How to file 1040x electronically   The OID listed is for each $1,000 of redemption price. How to file 1040x electronically You must adjust the listed amount if your debt instrument has a different principal amount. How to file 1040x electronically For example, if you have a debt instrument with a $500 principal amount, use one-half the listed amount to figure your OID. How to file 1040x electronically   Use the OID shown in Section I-B for a calendar year if you held the debt instrument the entire year. How to file 1040x electronically (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. How to file 1040x electronically ) If you did not hold the debt instrument the entire year, figure your OID as follows. How to file 1040x electronically Look up the daily OID for the first accrual period in which you held the debt instrument during a calendar year. How to file 1040x electronically (See Accrual period under Constant yield method, later. How to file 1040x electronically ) Multiply the daily OID by the number of days you held the debt instrument during that accrual period. How to file 1040x electronically Repeat (1) and (2) for any remaining accrual periods in which you held the debt instrument. How to file 1040x electronically Add the results of (2) and (3). How to file 1040x electronically This is the OID to include in income for that year, unless you paid an acquisition premium. How to file 1040x electronically (The reduction for acquisition premium is discussed later. How to file 1040x electronically ) Tax-exempt bond. How to file 1040x electronically   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. How to file 1040x electronically You need to make this adjustment to determine if you have a gain or loss on a later disposition of the bond. How to file 1040x electronically In general, use the rules that follow to determine your OID. How to file 1040x electronically Constant yield method. How to file 1040x electronically   This discussion shows how to figure OID on debt instruments issued after 1984 using a constant yield method. How to file 1040x electronically (The special rules that apply to contingent payment debt instruments and inflation-indexed debt instruments are explained later. How to file 1040x electronically ) OID is allocated over the life of the debt instrument through adjustments to the issue price for each accrual period. How to file 1040x electronically   Figure the OID allocable to any accrual period as follows. How to file 1040x electronically Multiply the adjusted issue price at the beginning of the accrual period by a fraction. How to file 1040x electronically The numerator of the fraction is the debt instrument's yield to maturity and the denominator is the number of accrual periods per year. How to file 1040x electronically The yield must be stated appropriately taking into account the length of the particular accrual period. How to file 1040x electronically Subtract from the result in (1) any qualified stated interest allocable to the accrual period. How to file 1040x electronically Accrual period. How to file 1040x electronically   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. How to file 1040x electronically For example, a debt instrument maturing on March 31 has accrual periods that end on September 30 and March 31 of each calendar year. How to file 1040x electronically Any short period is included as the first accrual period. How to file 1040x electronically   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. How to file 1040x electronically However, the OID listed for these debt instruments in Section I-B has been figured using 6-month accrual periods. How to file 1040x electronically Daily OID. How to file 1040x electronically   The OID for any accrual period is allocated equally to each day in the accrual period. How to file 1040x electronically Figure the amount to include in income by adding the OID for each day you hold the debt instrument during the year. How to file 1040x electronically 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. How to file 1040x electronically 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. How to file 1040x electronically Figuring daily OID. How to file 1040x electronically   The daily OID for the initial accrual period is figured using the following formula. How to file 1040x electronically   (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. How to file 1040x electronically Example 5. How to file 1040x electronically On January 1 of Year 1, you bought a 15-year, 10% debt instrument of A Corporation at original issue for $86,235. How to file 1040x electronically 17. How to file 1040x electronically According to the prospectus, the debt instrument matures on December 31 of Year 15 at a stated redemption price of $100,000. How to file 1040x electronically The yield to maturity is 12%, compounded semiannually. How to file 1040x electronically The debt instrument provides for qualified stated interest payments of $5,000 on June 30 and December 31 of each calendar year. How to file 1040x electronically The accrual periods are the 6-month periods ending on each of these dates. How to file 1040x electronically The number of days for the first accrual period (January 1 through June 30) is 181 days (182 for leap years). How to file 1040x electronically The daily OID for the first accrual period is figured as follows. How to file 1040x electronically   ($86,235. How to file 1040x electronically 17 x . How to file 1040x electronically 12/2) – $5,000     181 days     = $174. How to file 1040x electronically 11020 = $. How to file 1040x electronically 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. How to file 1040x electronically 17 + $174. How to file 1040x electronically 11), or $86,409. How to file 1040x electronically 28. How to file 1040x electronically The number of days for the second accrual period (July 1 through December 31) is 184 days. How to file 1040x electronically The daily OID for the second accrual period is figured as follows. How to file 1040x electronically   ($86,409. How to file 1040x electronically 28 x . How to file 1040x electronically 12/2) – $5,000     184 days     = $184. How to file 1040x electronically 55681 = $1. How to file 1040x electronically 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, $174. How to file 1040x electronically 11 ($. How to file 1040x electronically 95665 × 182 days) plus $184. How to file 1040x electronically 56 ($1. How to file 1040x electronically 00303 × 184 days), or $358. How to file 1040x electronically 67. How to file 1040x electronically Add the OID to the $10,000 interest you report on your income tax return for Year 1. How to file 1040x electronically Example 6. How to file 1040x electronically 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. How to file 1040x electronically Also, the interest payment dates are October 31 and April 30 of each calendar year. How to file 1040x electronically The accrual periods are the 6-month periods ending on each of these dates. How to file 1040x electronically The number of days for the first accrual period (May 1 through October 31) is 184 days. How to file 1040x electronically The daily OID for the first accrual period is figured as follows. How to file 1040x electronically   ($86,235. How to file 1040x electronically 17 x . How to file 1040x electronically 12/2) – $5,000     184 days     = $174. How to file 1040x electronically 11020 = $. How to file 1040x electronically 94625   184           The number of days for the second accrual period (November 1 through April 30) is 181 days (182 for leap years). How to file 1040x electronically The daily OID for the second accrual period is figured as follows. How to file 1040x electronically   ($86,409. How to file 1040x electronically 28 x . How to file 1040x electronically 12/2) – $5,000     181 days     = $184. How to file 1040x electronically 55681 = $1. How to file 1040x electronically 01965   181 If you hold the debt instrument through the end of Year 1, you must include $236. How to file 1040x electronically 31 of OID in income. How to file 1040x electronically This is $174. How to file 1040x electronically 11 ($. How to file 1040x electronically 94625 × 184 days) for the period May 1 through October 31 plus $62. How to file 1040x electronically 20 ($1. How to file 1040x electronically 01965 × 61 days) for the period November 1 through December 31. How to file 1040x electronically The OID is added to the $5,000 interest income paid on October 31 of Year 1. How to file 1040x electronically Your basis in the debt instrument is increased by the OID you include in income. How to file 1040x electronically On January 1 of Year 2, your basis in the A Corporation debt instrument is $86,471. How to file 1040x electronically 48 ($86,235. How to file 1040x electronically 17 + $236. How to file 1040x electronically 31). How to file 1040x electronically Short first accrual period. How to file 1040x electronically   You may have to make adjustments if a debt instrument has a short first accrual period. How to file 1040x electronically 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. How to file 1040x electronically (The remaining accrual periods begin on May 1 and November 1. How to file 1040x electronically ) For this short period, figure the daily OID as described earlier, but adjust the yield for the length of the short accrual period. How to file 1040x electronically You may use any reasonable compounding method in determining OID for a short period. How to file 1040x electronically Examples of reasonable compounding methods include continuous compounding and monthly compounding (that is, simple interest within a month). How to file 1040x electronically Consult your tax advisor for more information about making this computation. How to file 1040x electronically   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. How to file 1040x electronically Reduction for acquisition premium. How to file 1040x electronically   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. How to file 1040x electronically To figure the daily acquisition premium, multiply the daily OID by the following fraction. How to file 1040x electronically The numerator is the acquisition premium. How to file 1040x electronically The denominator is the total OID remaining for the debt instrument after your purchase date. How to file 1040x electronically Example 7. How to file 1040x electronically 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. How to file 1040x electronically The adjusted issue price on November 1 of Year 1 is $86,409. How to file 1040x electronically 28 ($86,235. How to file 1040x electronically 17 + $174. How to file 1040x electronically 11). How to file 1040x electronically In this case, you paid an acquisition premium of $590. How to file 1040x electronically 72 ($87,000 − $86,409. How to file 1040x electronically 28). How to file 1040x electronically The daily OID for the accrual period November 1 through April 30, reduced for the acquisition premium, is figured as follows. How to file 1040x electronically 1) Daily OID on date of purchase (2nd accrual period) $1. How to file 1040x electronically 01965*  2)  Acquisition premium $590. How to file 1040x electronically 72    3)  Total OID remaining after purchase date ($13,764. How to file 1040x electronically 83 − $174. How to file 1040x electronically 11) 13,590. How to file 1040x electronically 72   4) Line 2 ÷ line 3 . How to file 1040x electronically 04346  5)  Line 1 × line 4 . How to file 1040x electronically 04432  6)  Daily OID reduced for the acquisition premium. How to file 1040x electronically Line 1 − line 5 $0. How to file 1040x electronically 97533  * As shown in Example 6. How to file 1040x electronically The total OID to include in income for Year 1 is $59. How to file 1040x electronically 50 ($. How to file 1040x electronically 97533 × 61 days). How to file 1040x electronically 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. How to file 1040x electronically In general, a contingent payment debt instrument provides for one or more payments that are contingent as to timing or amount. How to file 1040x electronically If you hold a contingent payment bond, you must report OID as it accrues each year. How to file 1040x electronically 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. How to file 1040x electronically To figure OID accruals on contingent payment debt instruments, holders and issuers must use the noncontingent bond method. How to file 1040x electronically Noncontingent bond method. How to file 1040x electronically    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. How to file 1040x electronically In general, holders and issuers accrue OID on this projected payment schedule using the constant yield method that applies to fixed payment debt instruments. How to file 1040x electronically When a contingent payment differs from the projected fixed amount, the holders and issuers make adjustments to their OID accruals. How to file 1040x electronically If the actual contingent payment is larger than expected, both the issuer and the holder increase their OID accruals. How to file 1040x electronically If the actual contingent payment is smaller than expected, holders and issuers generally decrease their OID accruals. How to file 1040x electronically Form 1099-OID. How to file 1040x electronically   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. How to file 1040x electronically For example, the amount may not be correct if the contingent payment was different from the projected amount. How to file 1040x electronically If the amount in box 1 is not correct, you must figure the OID to report on your return under the following rules. How to file 1040x electronically For information on showing an OID adjustment on your tax return, see How To Report OID, earlier. How to file 1040x electronically Figuring OID. How to file 1040x electronically   To figure OID on a contingent payment debt instrument, you need to know the “comparable yield” and “projected payment schedule” of the debt instrument. How to file 1040x electronically The issuer must make these available to you. How to file 1040x electronically Comparable yield. How to file 1040x electronically   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. How to file 1040x electronically The comparable yield is determined as of the debt instrument's issue date. How to file 1040x electronically Projected payment schedule. How to file 1040x electronically   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. How to file 1040x electronically The projected payment schedule is created by the issuer as of the debt instrument's issue date. How to file 1040x electronically It is used to determine the issuer's and holder's interest accruals and adjustments. How to file 1040x electronically Steps for figuring OID. How to file 1040x electronically   Figure the OID on a contingent payment debt instrument in two steps. How to file 1040x electronically Figure the OID using the constant yield method (discussed earlier under Debt Instruments Issued After 1984 ) that applies to fixed payment debt instruments. How to file 1040x electronically Use the comparable yield as the yield to maturity. How to file 1040x electronically 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). How to file 1040x electronically Do not treat any amount payable as qualified stated interest. How to file 1040x electronically Adjust the OID in (1) to account for actual contingent payments. How to file 1040x electronically If the contingent payment is greater than the projected fixed amount, you have a positive adjustment. How to file 1040x electronically If the contingent payment is less than the projected fixed amount, you have a negative adjustment. How to file 1040x electronically Net positive adjustment. How to file 1040x electronically   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. How to file 1040x electronically Treat a net positive adjustment as additional OID for the tax year. How to file 1040x electronically Net negative adjustment. How to file 1040x electronically   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. How to file 1040x electronically Use a net negative adjustment to offset OID on the debt instrument for the tax year. How to file 1040x electronically 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. How to file 1040x electronically 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. How to file 1040x electronically 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. How to file 1040x electronically Basis adjustments. How to file 1040x electronically   In general, increase your basis in a contingent payment debt instrument by the OID included in income. How to file 1040x electronically Your basis, however, is not affected by any negative or positive adjustments. How to file 1040x electronically Decrease your basis by any noncontingent payment received and the projected contingent payment scheduled to be received. How to file 1040x electronically Treatment of gain or loss on sale or exchange. How to file 1040x electronically   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. How to file 1040x electronically 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. How to file 1040x electronically If the debt instrument is a capital asset, treat any loss that is more than your prior OID accruals as a capital loss. How to file 1040x electronically See Regulations section 1. How to file 1040x electronically 1275-4 for exceptions to these rules. How to file 1040x electronically Premium, acquisition premium, and market discount. How to file 1040x electronically   The rules for accruing premium, acquisition premium, and market discount do not apply to a contingent payment debt instrument. How to file 1040x electronically See Regulations section 1. How to file 1040x electronically 1275-4 to determine how to account for these items. How to file 1040x electronically Inflation-Indexed Debt Instruments This discussion shows how you figure OID on certain inflation-indexed debt instruments issued after January 5, 1997. How to file 1040x electronically An inflation-indexed debt instrument is generally a debt instrument on which the payments are adjusted for inflation and d
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The How To File 1040x Electronically

How to file 1040x electronically 2. How to file 1040x electronically   Accounting Methods Table of Contents Introduction Topics - This chapter discusses: Useful Items - You may want to see: Accounting MethodsCash Method Accrual Method Farm Inventory Cash Versus Accrual Method Special Methods of Accounting Combination Method Changes in Methods of Accounting Introduction You must use an accounting method that clearly shows your income and expenses. How to file 1040x electronically You must also figure your taxable income and file an income tax return for an annual accounting period called a tax year. How to file 1040x electronically This chapter discusses accounting methods. How to file 1040x electronically For information on accounting periods, see Publication 538, Accounting Periods and Methods, and the Instructions for Form 1128, Application To Adopt, Change, or Retain a Tax Year. How to file 1040x electronically Topics - This chapter discusses: Cash method Accrual method Farm inventory Special methods of accounting Changes in methods of accounting Useful Items - You may want to see: Publication 538 Accounting Periods and Methods 535 Business Expenses Form (and Instructions) 1128 Application To Adopt, Change, or Retain a Tax Year 3115 Application for Change in Accounting Method See chapter 16 for information about getting publications and forms. How to file 1040x electronically Accounting Methods An accounting method is a set of rules used to determine when and how your income and expenses are reported on your tax return. How to file 1040x electronically Your accounting method includes not only your overall method of accounting, but also the accounting treatment you use for any material item. How to file 1040x electronically A material item is one that affects the proper time for inclusion of income or allowance of a deduction. How to file 1040x electronically An item considered material for financial statement purposes is generally also considered material for income tax purposes. How to file 1040x electronically See Publication 538 for more information. How to file 1040x electronically You generally choose an accounting method for your farm business when you file your first income tax return that includes a Schedule F (Form 1040), Profit or Loss From Farming. How to file 1040x electronically If you later want to change your accounting method, you generally must get IRS approval. How to file 1040x electronically How to obtain IRS approval is discussed later under Changes in Methods of Accounting . How to file 1040x electronically Types of accounting methods. How to file 1040x electronically   Generally, you can use any of the following accounting methods. How to file 1040x electronically Each method is discussed in detail below. How to file 1040x electronically Cash method. How to file 1040x electronically Accrual method. How to file 1040x electronically Special methods of accounting for certain items of income and expenses. How to file 1040x electronically Combination (hybrid) method using elements of two or more of the above. How to file 1040x electronically Business and other items. How to file 1040x electronically   You can account for business and personal items using different accounting methods. How to file 1040x electronically For example, you can figure your business income under an accrual method, even if you use the cash method to figure personal items. How to file 1040x electronically Two or more businesses. How to file 1040x electronically   If you operate two or more separate and distinct businesses, you can use a different accounting method for each business. How to file 1040x electronically Generally, no business is separate and distinct unless a complete and separate set of books and records is maintained for each business. How to file 1040x electronically Cash Method Most farmers use the cash method because they find it easier to keep records using the cash method. How to file 1040x electronically However, certain farm corporations and partnerships and all tax shelters must use an accrual method of accounting. How to file 1040x electronically See Accrual Method Required , later. How to file 1040x electronically Income Under the cash method, include in your gross income all items of income you actually or constructively received during the tax year. How to file 1040x electronically Items of income include money received as well as property or services received. How to file 1040x electronically If you receive property or services, you must include the fair market value (FMV) of the property or services in income. How to file 1040x electronically See chapter 3 for information on how to report farm income on your income tax return. How to file 1040x electronically Constructive receipt. How to file 1040x electronically   Income is constructively received when an amount is credited to your account or made available to you without restriction. How to file 1040x electronically You do not need to have possession of the income for it to be treated as income for the tax year. How to file 1040x electronically If you authorize someone to be your agent and receive income for you, you are considered to have received the income when your agent receives it. How to file 1040x electronically Income is not constructively received if your receipt of the income is subject to substantial restrictions or limitations. How to file 1040x electronically Direct payments and counter-cyclical payments. How to file 1040x electronically   If you received direct payments or counter-cyclical payments under Subtitle A or C of the Farm Security and Rural Investment Act of 2002, you will not be considered to have constructively received a payment merely because you had the option to receive it in the year before it is required to be paid. How to file 1040x electronically Delaying receipt of income. How to file 1040x electronically   You cannot hold checks or postpone taking possession of similar property from one tax year to another to avoid paying tax on the income. How to file 1040x electronically You must report the income in the year the money or property is received or made available to you without restriction. How to file 1040x electronically Example. How to file 1040x electronically Frances Jones, a farmer, was entitled to receive a $10,000 payment on a grain contract in December 2013. How to file 1040x electronically She was told in December that her payment was available. How to file 1040x electronically She requested not to be paid until January 2014. How to file 1040x electronically However, she must still include this payment in her 2013 income because it was made available to her in 2013. How to file 1040x electronically Debts paid by another person or canceled. How to file 1040x electronically   If your debts are paid by another person or are canceled by your creditors, you may have to report part or all of this debt relief as income. How to file 1040x electronically If you receive income in this way, you constructively receive the income when the debt is canceled or paid. How to file 1040x electronically See Cancellation of Debt in chapter 3. How to file 1040x electronically Deferred payment contract. How to file 1040x electronically   If you sell an item under a deferred payment contract that calls for payment in a future year, there is no constructive receipt in the year of sale. How to file 1040x electronically However, if the sales contract states that you have the right to the proceeds of the sale from the buyer at any time after delivery of the item, then you must include the sales price in income in the year of the sale, regardless of when you actually receive payment. How to file 1040x electronically Example. How to file 1040x electronically You are a farmer who uses the cash method and a calendar tax year. How to file 1040x electronically You sell grain in December 2013 under a bona fide arm's-length contract that calls for payment in 2014. How to file 1040x electronically You include the proceeds from the sale in your 2014 gross income since that is the year payment is received. How to file 1040x electronically However, if the contract states that you have the right to the proceeds from the buyer at any time after the grain is delivered, you must include the sales price in your 2013 income, regardless of when you actually receive payment. How to file 1040x electronically Repayment of income. How to file 1040x electronically   If you include an amount in income and in a later year you have to repay all or part of it, then you can usually deduct the repayment in the year repaid. How to file 1040x electronically If the repayment is more than $3,000, a special rule applies. How to file 1040x electronically For details, see Repayments in chapter 11 of Publication 535, Business Expenses. How to file 1040x electronically Expenses Under the cash method, generally you deduct expenses in the tax year you pay them. How to file 1040x electronically This includes business expenses for which you contest liability. How to file 1040x electronically However, you may not be able to deduct an expense paid in advance or you may be required to capitalize certain costs, as explained under Uniform Capitalization Rules in chapter 6. How to file 1040x electronically See chapter 4 for information on how to deduct farm business expenses on your income tax return. How to file 1040x electronically Prepayment. How to file 1040x electronically   Generally, you cannot deduct expenses paid in advance. How to file 1040x electronically This rule applies to any expense paid far enough in advance to, in effect, create an asset with a useful life extending substantially beyond the end of the current tax year. How to file 1040x electronically Example. How to file 1040x electronically On November 1, 2013, you signed and paid $3,600 for a 3-year (36-month) insurance contract for equipment. How to file 1040x electronically In 2013, you are allowed to deduct only $200 (2/36 x $3,600) of the cost of the policy that is attributable to 2013. How to file 1040x electronically In 2014, you'll be able to deduct $1,200 (12/36 x $3,600); in 2015, you'll be able to deduct $1,200 (12/36 x $3,600); and in 2016 you'll be able to deduct the remaining balance of $1,000. How to file 1040x electronically An exception applies if the expense qualifies for the 12-month rule. How to file 1040x electronically See Publication 538 for more information and examples. How to file 1040x electronically See chapter 4 for special rules for prepaid farm supplies and prepaid livestock feed. How to file 1040x electronically Accrual Method Under an accrual method of accounting, you generally report income in the year earned and deduct or capitalize expenses in the year incurred. How to file 1040x electronically The purpose of an accrual method of accounting is to correctly match income and expenses. How to file 1040x electronically Certain businesses engaged in farming must use an accrual method of accounting for its farm business and for sales and purchases of inventory items. How to file 1040x electronically See Accrual Method Required and Farm Inventory , later. How to file 1040x electronically Income Generally, you include an amount in income for the tax year in which all events that fix your right to receive the income have occurred, and you can determine the amount with reasonable accuracy. How to file 1040x electronically Under this rule, include an amount in income on the earliest of the following dates. How to file 1040x electronically When you receive payment. How to file 1040x electronically When the income amount is due to you. How to file 1040x electronically When you earn the income. How to file 1040x electronically When title passes. How to file 1040x electronically If you use an accrual method of accounting, complete Part III of Schedule F (Form 1040) to report your income. How to file 1040x electronically Inventory. How to file 1040x electronically   If you keep an inventory, generally you must use an accrual method of accounting to determine your gross income. How to file 1040x electronically An inventory is necessary to clearly show income when the production, purchase, or sale of merchandise is an income-producing factor. How to file 1040x electronically See Publication 538 for more information. How to file 1040x electronically Also see Farm Inventory , later, for more information on items that must be included in inventory by farmers and inventory valuation methods for farmers. How to file 1040x electronically Expenses Under an accrual method of accounting, you generally deduct or capitalize a business expense when both of the following apply. How to file 1040x electronically The all-events test has been met. How to file 1040x electronically This test is met when: All events have occurred that fix the fact that you have a liability, and The amount of the liability can be determined with reasonable accuracy. How to file 1040x electronically Economic performance has occurred. How to file 1040x electronically Economic performance. How to file 1040x electronically   Generally, you cannot deduct or capitalize a business expense until economic performance occurs. How to file 1040x electronically If your expense is for property or services provided to you, or for your use of property, economic performance occurs as the property or services are provided or as the property is used. How to file 1040x electronically If your expense is for property or services you provide to others, economic performance occurs as you provide the property or services. How to file 1040x electronically Example. How to file 1040x electronically Jane, who is a farmer, uses a calendar tax year and an accrual method of accounting. How to file 1040x electronically She entered into a contract with ABC Farm Consulting in 2012. How to file 1040x electronically The contract stated that Jane pay ABC Farm Consulting $2,000 in December 2012. How to file 1040x electronically It further stipulates that ABC Farm Consulting will develop a plan for integrating her farm with a larger farm operation based in a neighboring state by March 1, 2013. How to file 1040x electronically Jane paid ABC Farm Consulting $2,000 in December 2012. How to file 1040x electronically Integration of operations according to the plan began in May 2013 and they completed the integration in December 2013. How to file 1040x electronically Economic performance for Jane's liability in the contract occurs as the services are provided. How to file 1040x electronically Jane incurs the $2,000 cost in 2013. How to file 1040x electronically An exception to the economic performance rule allows certain recurring items to be treated as incurred during a tax year even though economic performance has not occurred. How to file 1040x electronically For more information, see Economic Performance in Publication 538. How to file 1040x electronically Special rule for related persons. How to file 1040x electronically   Business expenses and interest owed to a related person who uses the cash method of accounting are not deductible until you make the payment and the corresponding amount is includible in the related person's gross income. How to file 1040x electronically Determine the relationship for this rule as of the end of the tax year for which the expense or interest would otherwise be deductible. How to file 1040x electronically For more information, see Internal Revenue Code section 267. How to file 1040x electronically Accrual Method Required Generally, the following businesses, if engaged in farming, must use an accrual method of accounting. How to file 1040x electronically A corporation (other than a family corporation) that had gross receipts of more than $1,000,000 for any tax year beginning after 1975. How to file 1040x electronically A family corporation that had gross receipts of more than $25,000,000 for any tax year beginning after 1985. How to file 1040x electronically A partnership with a corporation as a partner, if that corporation meets the requirements of (1) or (2) above. How to file 1040x electronically A tax shelter. How to file 1040x electronically Note. How to file 1040x electronically Items (1), (2), and (3) above do not apply to an S corporation or a business operating a nursery or sod farm, or the raising or harvesting of trees (other than fruit and nut trees). How to file 1040x electronically Family corporation. How to file 1040x electronically   A family corporation is generally a corporation that meets one of the following ownership requirements. How to file 1040x electronically Members of the same family own at least 50% of the total combined voting power of all classes of stock entitled to vote and at least 50% of the total shares of all other classes of stock of the corporation. How to file 1040x electronically Members of two families have owned, directly or indirectly, since October 4, 1976, at least 65% of the total combined voting power of all classes of voting stock and at least 65% of the total shares of all other classes of the corporation's stock. How to file 1040x electronically Members of three families have owned, directly or indirectly, since October 4, 1976, at least 50% of the total combined voting power of all classes of voting stock and at least 50% of the total shares of all other classes of the corporation's stock. How to file 1040x electronically For more information on family corporations, see Internal Revenue Code section 447. How to file 1040x electronically Tax shelter. How to file 1040x electronically   A tax shelter is a partnership, noncorporate enterprise, or S corporation that meets either of the following tests. How to file 1040x electronically Its principal purpose is the avoidance or evasion of federal income tax. How to file 1040x electronically It is a farming syndicate. How to file 1040x electronically A farming syndicate is an entity that meets either of the following tests. How to file 1040x electronically Interests in the activity have been offered for sale in an offering required to be registered with a federal or state agency with the authority to regulate the offering of securities for sale. How to file 1040x electronically More than 35% of the losses during the tax year are allocable to limited partners or limited entrepreneurs. How to file 1040x electronically   A “limited partner” is one whose personal liability for partnership debts is limited to the money or other property the partner contributed or is required to contribute to the partnership. How to file 1040x electronically   A “limited entrepreneur” is one who has an interest in an enterprise other than as a limited partner and does not actively participate in the management of the enterprise. How to file 1040x electronically Farm Inventory If you are required to keep an inventory, you should keep a complete record of your inventory as part of your farm records. How to file 1040x electronically This record should show the actual count or measurement of the inventory. How to file 1040x electronically It should also show all factors that enter into its valuation, including quality and weight, if applicable. How to file 1040x electronically Hatchery business. How to file 1040x electronically   If you are in the hatchery business, and use an accrual method of accounting, you must include in inventory eggs in the process of incubation. How to file 1040x electronically Products held for sale. How to file 1040x electronically   All harvested and purchased farm products held for sale or for feed or seed, such as grain, hay, silage, concentrates, cotton, tobacco, etc. How to file 1040x electronically , must be included in inventory. How to file 1040x electronically Supplies. How to file 1040x electronically   Supplies acquired for sale or that become a physical part of items held for sale must be included in inventory. How to file 1040x electronically Deduct the cost of supplies in the year used or consumed in operations. How to file 1040x electronically Do not include incidental supplies in inventory as these are deductible in the year of purchase. How to file 1040x electronically Livestock. How to file 1040x electronically   Livestock held primarily for sale must be included in inventory. How to file 1040x electronically Livestock held for draft, breeding, or dairy purposes can either be depreciated or included in inventory. How to file 1040x electronically See also Unit-livestock-price method , later. How to file 1040x electronically If you are in the business of breeding and raising chinchillas, mink, foxes, or other fur-bearing animals, these animals are livestock for inventory purposes. How to file 1040x electronically Growing crops. How to file 1040x electronically   Generally, growing crops are not required to be included in inventory. How to file 1040x electronically However, if the crop has a preproductive period of more than 2 years, you may have to capitalize (or include in inventory) costs associated with the crop. How to file 1040x electronically See Uniform capitalization rules below. How to file 1040x electronically Also see Uniform Capitalization Rules in  chapter 6. How to file 1040x electronically Items to include in inventory. How to file 1040x electronically   Your inventory should include all items held for sale, or for use as feed, seed, etc. How to file 1040x electronically , whether raised or purchased, that are unsold at the end of the year. How to file 1040x electronically Uniform capitalization rules. How to file 1040x electronically   The following applies if you are required to use an accrual method of accounting. How to file 1040x electronically The uniform capitalization rules apply to all costs of raising a plant, even if the preproductive period of raising a plant is 2 years or less. How to file 1040x electronically The costs of animals are subject to the uniform capitalization rules. How to file 1040x electronically Inventory valuation methods. How to file 1040x electronically   The following methods, described below, are those generally available for valuing inventory. How to file 1040x electronically The method you use must conform to generally accepted accounting principles for similar businesses and must clearly reflect income. How to file 1040x electronically Cost. How to file 1040x electronically Lower of cost or market. How to file 1040x electronically Farm-price method. How to file 1040x electronically Unit-livestock-price method. How to file 1040x electronically Cost and lower of cost or market methods. How to file 1040x electronically   See Publication 538 for information on these valuation methods. How to file 1040x electronically If you value your livestock inventory at cost or the lower of cost or market, you do not need IRS approval to change to the unit-livestock-price method. How to file 1040x electronically However, if you value your livestock inventory using the farm-price method, then you must obtain permission from the IRS to change to the unit-livestock-price method. How to file 1040x electronically Farm-price method. How to file 1040x electronically   Under this method, each item, whether raised or purchased, is valued at its market price less the direct cost of disposition. How to file 1040x electronically Market price is the current price at the nearest market in the quantities you usually sell. How to file 1040x electronically Cost of disposition includes broker's commissions, freight, hauling to market, and other marketing costs. How to file 1040x electronically If you use this method, you must use it for your entire inventory, except that livestock can be inventoried under the unit-livestock-price method. How to file 1040x electronically Unit-livestock-price method. How to file 1040x electronically   This method recognizes the difficulty of establishing the exact costs of producing and raising each animal. How to file 1040x electronically You group or classify livestock according to type and age and use a standard unit price for each animal within a class or group. How to file 1040x electronically The unit price you assign should reasonably approximate the normal costs incurred in producing the animals in such classes. How to file 1040x electronically Unit prices and classifications are subject to approval by the IRS on examination of your return. How to file 1040x electronically You must annually reevaluate your unit livestock prices and adjust the prices upward or downward to reflect increases or decreases in the costs of raising livestock. How to file 1040x electronically IRS approval is not required for these adjustments. How to file 1040x electronically Any other changes in unit prices or classifications do require IRS approval. How to file 1040x electronically   If you use this method, include all raised livestock in inventory, regardless of whether they are held for sale or for draft, breeding, sport, or dairy purposes. How to file 1040x electronically This method accounts only for the increase in cost of raising an animal to maturity. How to file 1040x electronically It does not provide for any decrease in the animal's market value after it reaches maturity. How to file 1040x electronically Also, if you raise cattle, you are not required to inventory hay you grow to feed your herd. How to file 1040x electronically   Do not include sold or lost animals in the year-end inventory. How to file 1040x electronically If your records do not show which animals were sold or lost, treat the first animals acquired as sold or lost. How to file 1040x electronically The animals on hand at the end of the year are considered those most recently acquired. How to file 1040x electronically   You must include in inventory all livestock purchased primarily for sale. How to file 1040x electronically You can choose either to include in inventory or depreciate livestock purchased for draft, breeding, sport or dairy purposes. How to file 1040x electronically However, you must be consistent from year to year, regardless of the method you have chosen. How to file 1040x electronically You cannot change your method without obtaining approval from the IRS. How to file 1040x electronically   You must include in inventory animals purchased after maturity or capitalize them at their purchase price. How to file 1040x electronically If the animals are not mature at purchase, increase the cost at the end of each tax year according to the established unit price. How to file 1040x electronically However, in the year of purchase, do not increase the cost of any animal purchased during the last 6 months of the year. How to file 1040x electronically This “no increase” rule does not apply to tax shelters which must make an adjustment for any animal purchased during the year. How to file 1040x electronically It also does not apply to taxpayers that must make an adjustment to reasonably reflect the particular period in the year in which animals are purchased, if necessary to avoid significant distortions in income. How to file 1040x electronically Uniform capitalization rules. How to file 1040x electronically   A farmer can determine costs required to be allocated under the uniform capitalization rules by using the farm-price or unit-livestock-price inventory method. How to file 1040x electronically This applies to any plant or animal, even if the farmer does not hold or treat the plant or animal as inventory property. How to file 1040x electronically Cash Versus Accrual Method The following examples compare the cash and accrual methods of accounting. How to file 1040x electronically Example 1. How to file 1040x electronically You are a farmer who uses an accrual method of accounting. How to file 1040x electronically You keep your books on the calendar year basis. How to file 1040x electronically You sell grain in December 2013 but you are not paid until January 2014. How to file 1040x electronically Because the accrual method was used and 2013 was the tax year in which the grain was sold, you must both include the sales proceeds and deduct the costs incurred in producing the grain on your 2013 tax return. How to file 1040x electronically Example 2. How to file 1040x electronically Assume the same facts as in Example 1 except that you use the cash method and there was no constructive receipt of the sales proceeds in 2013. How to file 1040x electronically Under this method, you include the sales proceeds in income for 2014, the year you receive payment. How to file 1040x electronically Deduct the costs of producing the grain in the year you pay for them. How to file 1040x electronically Special Methods of Accounting There are special methods of accounting for certain items of income and expense. How to file 1040x electronically Crop method. How to file 1040x electronically   If you do not harvest and dispose of your crop in the same tax year that you plant it, you can, with IRS approval, use the crop method of accounting. How to file 1040x electronically You cannot use the crop method for any tax return, including your first tax return, unless you receive approval from the IRS. How to file 1040x electronically Under this method, you deduct the entire cost of producing the crop, including the expense of seed or young plants, in the year you realize income from the crop. How to file 1040x electronically    See chapter 4 for details on deducting the costs of operating a farm. How to file 1040x electronically Also see Regulations section 1. How to file 1040x electronically 162-12. How to file 1040x electronically Other special methods. How to file 1040x electronically   Other special methods of accounting apply to the following items. How to file 1040x electronically Amortization, see chapter 7. How to file 1040x electronically Casualties, see chapter 11. How to file 1040x electronically Condemnations, see chapter 11. How to file 1040x electronically Depletion, see chapter 7. How to file 1040x electronically Depreciation, see chapter 7. How to file 1040x electronically Farm business expenses, see chapter 4. How to file 1040x electronically Farm income, see chapter 3. How to file 1040x electronically Installment sales, see chapter 10. How to file 1040x electronically Soil and water conservation expenses, see chapter 5. How to file 1040x electronically Thefts, see chapter 11. How to file 1040x electronically Combination Method Generally, you can use any combination of cash, accrual, and special methods of accounting if the combination clearly shows your income and expenses and you use it consistently. How to file 1040x electronically However, the following restrictions apply. How to file 1040x electronically If you use the cash method for figuring your income, you must use the cash method for reporting your expenses. How to file 1040x electronically If you use an accrual method for reporting your expenses, you must use an accrual method for figuring your income. How to file 1040x electronically Changes in Methods of Accounting A change in your method of accounting includes a change in: Your overall method, such as from the cash method to an accrual method, and Your treatment of any material item, such as a change in your method of valuing inventory (for example, a change from the farm-price method to the unit-livestock-price method, discussed earlier). How to file 1040x electronically Generally, once you have set up your accounting method, you must receive approval from the IRS before you can change to another method of accounting. How to file 1040x electronically You may also have to pay a fee. How to file 1040x electronically To obtain approval, you must generally file Form 3115. How to file 1040x electronically There are instances when you can obtain automatic consent to change certain methods of accounting. How to file 1040x electronically See the List of Automatic Accounting Method Changes located in the Instructions for Form 3115. How to file 1040x electronically For more information on changes in methods of accounting, see Form 3115 and the Instructions for Form 3115. How to file 1040x electronically Also see Publication 538. How to file 1040x electronically Prev  Up  Next   Home   More Online Publications