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Irs gov efile Publication 584SP - Introductory Material Table of Contents Qué Hay de Nuevo Introduction Qué Hay de Nuevo Acontecimientos futuros. Irs gov efile  El IRS ha diseñado una página en el Internet, www. Irs gov efile irs. Irs gov efile gov/pub584sp, que incluye información sobre la Publicación 584(SP). Irs gov efile Toda información sobre desarrollos futuros que afecten la Publicación 584(SP) (como legislación aprobada después de que la publicación haya sido publicada) será anunciada en esta página. Irs gov efile Introduction Este registro se ha creado para ayudarlo a determinar la cantidad de una pérdida ocasionada por un desastre, hecho fortuito o robo que esté relacionada con propiedad de uso personal. Irs gov efile Contiene anexos para ayudarlo a calcular el valor de la pérdida de su residencia principal, de toda propiedad contenida dentro de la misma y de sus vehículos motorizados. Irs gov efile Sin embargo, estos anexos sólo son para su información. Irs gov efile Tiene que completar el Formulario 4684, Casualties and Thefts (Hechos Fortuitos y Robos), en inglés, para declarar su pérdida. Irs gov efile Prev  Up  Next   Home   More Online Publications
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Irs gov efile 4. Irs gov efile   Interest Table of Contents Introduction Topics - This chapter discusses: Useful Items - You may want to see: Allocation of InterestOrder of funds spent. Irs gov efile Payments from checking accounts. Irs gov efile Amounts paid within 30 days. Irs gov efile Optional method for determining date of reallocation. Irs gov efile Interest on a segregated account. Irs gov efile How to report. Irs gov efile Interest You Can DeductStatement. Irs gov efile Expenses paid to obtain a mortgage. Irs gov efile Prepayment penalty. Irs gov efile De minimis OID. Irs gov efile Constant-yield method. Irs gov efile Loan or mortgage ends. Irs gov efile Interest You Cannot DeductPenalties. Irs gov efile Who is a key person? Exceptions for pre-June 1997 contracts. Irs gov efile Interest allocated to unborrowed policy cash value. Irs gov efile Capitalization of Interest When To Deduct InterestPrepaid interest. Irs gov efile Discounted loan. Irs gov efile Refunds of interest. Irs gov efile Prepaid interest. Irs gov efile Discounted loan. Irs gov efile Tax deficiency. Irs gov efile Related person. Irs gov efile Below-Market LoansLimit on forgone interest for gift loans of $100,000 or less. Irs gov efile Introduction This chapter discusses the tax treatment of business interest expense. Irs gov efile Business interest expense is an amount charged for the use of money you borrowed for business activities. Irs gov efile Topics - This chapter discusses: Allocation of interest Interest you can deduct Interest you cannot deduct Capitalization of interest When to deduct interest Below-market loans Useful Items - You may want to see: Publication 537 Installment Sales 550 Investment Income and Expenses 936 Home Mortgage Interest Deduction Form (and Instructions) Sch A (Form 1040) Itemized Deductions Sch E (Form 1040) Supplemental Income and Loss Sch K-1 (Form 1065) Partner's Share of Income, Deductions, Credits, etc. Irs gov efile Sch K-1 (Form 1120S) Shareholder's Share of Income, Deductions, Credits, etc. Irs gov efile 1098 Mortgage Interest Statement 3115 Application for Change in Accounting Method 4952 Investment Interest Expense Deduction 8582 Passive Activity Loss Limitations See chapter 12 for information about getting publications and forms. Irs gov efile Allocation of Interest The rules for deducting interest vary, depending on whether the loan proceeds are used for business, personal, or investment activities. Irs gov efile If you use the proceeds of a loan for more than one type of expense, you must allocate the interest based on the use of the loan's proceeds. Irs gov efile Allocate your interest expense to the following categories. Irs gov efile Nonpassive trade or business activity interest Passive trade or business activity interest Investment interest Portfolio interest Personal interest In general, you allocate interest on a loan the same way you allocate the loan proceeds. Irs gov efile You allocate loan proceeds by tracing disbursements to specific uses. Irs gov efile The easiest way to trace disbursements to specific uses is to keep the proceeds of a particular loan separate from any other funds. Irs gov efile Secured loan. Irs gov efile   The allocation of loan proceeds and the related interest is not generally affected by the use of property that secures the loan. Irs gov efile Example. Irs gov efile You secure a loan with property used in your business. Irs gov efile You use the loan proceeds to buy an automobile for personal use. Irs gov efile You must allocate interest expense on the loan to personal use (purchase of the automobile) even though the loan is secured by business property. Irs gov efile    If the property that secures the loan is your home, you generally do not allocate the loan proceeds or the related interest. Irs gov efile The interest is usually deductible as qualified home mortgage interest, regardless of how the loan proceeds are used. Irs gov efile For more information, see Publication 936. Irs gov efile Allocation period. Irs gov efile   The period for which a loan is allocated to a particular use begins on the date the proceeds are used and ends on the earlier of the following dates. Irs gov efile The date the loan is repaid. Irs gov efile The date the loan is reallocated to another use. Irs gov efile Proceeds not disbursed to borrower. Irs gov efile   Even if the lender disburses the loan proceeds to a third party, the allocation of the loan is still based on your use of the funds. Irs gov efile This applies whether you pay for property, services, or anything else by incurring a loan, or you take property subject to a debt. Irs gov efile Proceeds deposited in borrower's account. Irs gov efile   Treat loan proceeds deposited in an account as property held for investment. Irs gov efile It does not matter whether the account pays interest. Irs gov efile Any interest you pay on the loan is investment interest expense. Irs gov efile If you withdraw the proceeds of the loan, you must reallocate the loan based on the use of the funds. Irs gov efile Example. Irs gov efile Celina, a calendar-year taxpayer, borrows $100,000 on January 4 and immediately uses the proceeds to open a checking account. Irs gov efile No other amounts are deposited in the account during the year and no part of the loan principal is repaid during the year. Irs gov efile On April 2, Celina uses $20,000 from the checking account for a passive activity expenditure. Irs gov efile On September 4, Celina uses an additional $40,000 from the account for personal purposes. Irs gov efile Under the interest allocation rules, the entire $100,000 loan is treated as property held for investment for the period from January 4 through April 1. Irs gov efile From April 2 through September 3, Celina must treat $20,000 of the loan as used in the passive activity and $80,000 of the loan as property held for investment. Irs gov efile From September 4 through December 31, she must treat $40,000 of the loan as used for personal purposes, $20,000 as used in the passive activity, and $40,000 as property held for investment. Irs gov efile Order of funds spent. Irs gov efile   Generally, you treat loan proceeds deposited in an account as used (spent) before either of the following amounts. Irs gov efile Any unborrowed amounts held in the same account. Irs gov efile Any amounts deposited after these loan proceeds. Irs gov efile Example. Irs gov efile On January 9, Olena opened a checking account, depositing $500 of the proceeds of Loan A and $1,000 of unborrowed funds. Irs gov efile The following table shows the transactions in her account during the tax year. Irs gov efile Date Transaction January 9 $500 proceeds of Loan A and $1,000 unborrowed funds deposited January 14 $500 proceeds of Loan B  deposited February 19 $800 used for personal purposes February 27 $700 used for passive activity June 19 $1,000 proceeds of Loan C  deposited November 20 $800 used for an investment December 18 $600 used for personal purposes Olena treats the $800 used for personal purposes as made from the $500 proceeds of Loan A and $300 of the proceeds of Loan B. Irs gov efile She treats the $700 used for a passive activity as made from the remaining $200 proceeds of Loan B and $500 of unborrowed funds. Irs gov efile She treats the $800 used for an investment as made entirely from the proceeds of Loan C. Irs gov efile She treats the $600 used for personal purposes as made from the remaining $200 proceeds of Loan C and $400 of unborrowed funds. Irs gov efile For the periods during which loan proceeds are held in the account, Olena treats them as property held for investment. Irs gov efile Payments from checking accounts. Irs gov efile   Generally, you treat a payment from a checking or similar account as made at the time the check is written if you mail or deliver it to the payee within a reasonable period after you write it. Irs gov efile You can treat checks written on the same day as written in any order. Irs gov efile Amounts paid within 30 days. Irs gov efile   If you receive loan proceeds in cash or if the loan proceeds are deposited in an account, you can treat any payment (up to the amount of the proceeds) made from any account you own, or from cash, as made from those proceeds. Irs gov efile This applies to any payment made within 30 days before or after the proceeds are received in cash or deposited in your account. Irs gov efile   If the loan proceeds are deposited in an account, you can apply this rule even if the rules stated earlier under Order of funds spent would otherwise require you to treat the proceeds as used for other purposes. Irs gov efile If you apply this rule to any payments, disregard those payments (and the proceeds from which they are made) when applying the rules stated under Order of funds spent. Irs gov efile   If you received the loan proceeds in cash, you can treat the payment as made on the date you received the cash instead of the date you actually made the payment. Irs gov efile Example. Irs gov efile Giovanni gets a loan of $1,000 on August 4 and receives the proceeds in cash. Irs gov efile Giovanni deposits $1,500 in an account on August 18 and on August 28 writes a check on the account for a passive activity expense. Irs gov efile Also, Giovanni deposits his paycheck, deposits other loan proceeds, and pays his bills during the same period. Irs gov efile Regardless of these other transactions, Giovanni can treat $1,000 of the deposit he made on August 18 as being paid on August 4 from the loan proceeds. Irs gov efile In addition, Giovanni can treat the passive activity expense he paid on August 28 as made from the $1,000 loan proceeds treated as deposited in the account. Irs gov efile Optional method for determining date of reallocation. Irs gov efile   You can use the following method to determine the date loan proceeds are reallocated to another use. Irs gov efile You can treat all payments from loan proceeds in the account during any month as taking place on the later of the following dates. Irs gov efile The first day of that month. Irs gov efile The date the loan proceeds are deposited in the account. Irs gov efile However, you can use this optional method only if you treat all payments from the account during the same calendar month in the same way. Irs gov efile Interest on a segregated account. Irs gov efile   If you have an account that contains only loan proceeds and interest earned on the account, you can treat any payment from that account as being made first from the interest. Irs gov efile When the interest earned is used up, any remaining payments are from loan proceeds. Irs gov efile Example. Irs gov efile You borrowed $20,000 and used the proceeds of this loan to open a new savings account. Irs gov efile When the account had earned interest of $867, you withdrew $20,000 for personal purposes. Irs gov efile You can treat the withdrawal as coming first from the interest earned on the account, $867, and then from the loan proceeds, $19,133 ($20,000 − $867). Irs gov efile All the interest charged on the loan from the time it was deposited in the account until the time of the withdrawal is investment interest expense. Irs gov efile The interest charged on the part of the proceeds used for personal purposes ($19,133) from the time you withdrew it until you either repay it or reallocate it to another use is personal interest expense. Irs gov efile The interest charged on the loan proceeds you left in the account ($867) continues to be investment interest expense until you either repay it or reallocate it to another use. Irs gov efile Loan repayment. Irs gov efile   When you repay any part of a loan allocated to more than one use, treat it as being repaid in the following order. Irs gov efile Personal use. Irs gov efile Investments and passive activities (other than those included in (3)). Irs gov efile Passive activities in connection with a rental real estate activity in which you actively participate. Irs gov efile Former passive activities. Irs gov efile Trade or business use and expenses for certain low-income housing projects. Irs gov efile Line of credit (continuous borrowings). Irs gov efile   The following rules apply if you have a line of credit or similar arrangement. Irs gov efile Treat all borrowed funds on which interest accrues at the same fixed or variable rate as a single loan. Irs gov efile Treat borrowed funds or parts of borrowed funds on which interest accrues at different fixed or variable rates as different loans. Irs gov efile Treat these loans as repaid in the order shown on the loan agreement. Irs gov efile Loan refinancing. Irs gov efile   Allocate the replacement loan to the same uses to which the repaid loan was allocated. Irs gov efile Make the allocation only to the extent you use the proceeds of the new loan to repay any part of the original loan. Irs gov efile Debt-financed distribution. Irs gov efile   A debt-financed distribution occurs when a partnership or S corporation borrows funds and allocates those funds to distributions made to partners or shareholders. Irs gov efile The manner in which you report the interest expense associated with the distributed debt proceeds depends on your use of those proceeds. Irs gov efile How to report. Irs gov efile   If the proceeds were used in a nonpassive trade or business activity, report the interest on Schedule E (Form 1040), line 28; enter “interest expense” and the name of the partnership or S corporation in column (a) and the amount in column (h). Irs gov efile If the proceeds were used in a passive activity, follow the Instructions for Form 8582, Passive Activity Loss Limitations, to determine the amount of interest expense that can be reported on Schedule E (Form 1040), line 28; enter “interest expense” and the name of the partnership in column (a) and the amount in column (f). Irs gov efile If the proceeds were used in an investment activity, enter the interest on Form 4952. Irs gov efile If the proceeds are used for personal purposes, the interest is generally not deductible. Irs gov efile Interest You Can Deduct You can generally deduct as a business expense all interest you pay or accrue during the tax year on debts related to your trade or business. Irs gov efile Interest relates to your trade or business if you use the proceeds of the loan for a trade or business expense. Irs gov efile It does not matter what type of property secures the loan. Irs gov efile You can deduct interest on a debt only if you meet all the following requirements. Irs gov efile You are legally liable for that debt. Irs gov efile Both you and the lender intend that the debt be repaid. Irs gov efile You and the lender have a true debtor-creditor relationship. Irs gov efile Partial liability. Irs gov efile   If you are liable for part of a business debt, you can deduct only your share of the total interest paid or accrued. Irs gov efile Example. Irs gov efile You and your brother borrow money. Irs gov efile You are liable for 50% of the note. Irs gov efile You use your half of the loan in your business, and you make one-half of the loan payments. Irs gov efile You can deduct your half of the total interest payments as a business deduction. Irs gov efile Mortgage. Irs gov efile   Generally, mortgage interest paid or accrued on real estate you own legally or equitably is deductible. Irs gov efile However, rather than deducting the interest currently, you may have to add it to the cost basis of the property as explained later under Capitalization of Interest. Irs gov efile Statement. Irs gov efile   If you paid $600 or more of mortgage interest (including certain points) during the year on any one mortgage, you generally will receive a Form 1098 or a similar statement. Irs gov efile You will receive the statement if you pay interest to a person (including a financial institution or a cooperative housing corporation) in the course of that person's trade or business. Irs gov efile A governmental unit is a person for purposes of furnishing the statement. Irs gov efile   If you receive a refund of interest you overpaid in an earlier year, this amount will be reported in box 3 of Form 1098. Irs gov efile You cannot deduct this amount. Irs gov efile For information on how to report this refund, see Refunds of interest, later in this chapter. Irs gov efile Expenses paid to obtain a mortgage. Irs gov efile   Certain expenses you pay to obtain a mortgage cannot be deducted as interest. Irs gov efile These expenses, which include mortgage commissions, abstract fees, and recording fees, are capital expenses. Irs gov efile If the property mortgaged is business or income-producing property, you can amortize the costs over the life of the mortgage. Irs gov efile Prepayment penalty. Irs gov efile   If you pay off your mortgage early and pay the lender a penalty for doing this, you can deduct the penalty as interest. Irs gov efile Interest on employment tax deficiency. Irs gov efile   Interest charged on employment taxes assessed on your business is deductible. Irs gov efile Original issue discount (OID). Irs gov efile   OID is a form of interest. Irs gov efile A loan (mortgage or other debt) generally has OID when its proceeds are less than its principal amount. Irs gov efile The OID is the difference between the stated redemption price at maturity and the issue price of the loan. Irs gov efile   A loan's stated redemption price at maturity is the sum of all amounts (principal and interest) payable on it other than qualified stated interest. Irs gov efile Qualified stated interest is stated interest that is unconditionally payable in cash or property (other than another loan of the issuer) at least annually over the term of the loan at a single fixed rate. Irs gov efile You generally deduct OID over the term of the loan. Irs gov efile Figure the amount to deduct each year using the constant-yield method, unless the OID on the loan is de minimis. Irs gov efile De minimis OID. Irs gov efile   The OID is de minimis if it is less than one-fourth of 1% (. Irs gov efile 0025) of the stated redemption price of the loan at maturity multiplied by the number of full years from the date of original issue to maturity (the term of the loan). Irs gov efile   If the OID is de minimis, you can choose one of the following ways to figure the amount you can deduct each year. Irs gov efile On a constant-yield basis over the term of the loan. Irs gov efile On a straight-line basis over the term of the loan. Irs gov efile In proportion to stated interest payments. Irs gov efile In its entirety at maturity of the loan. Irs gov efile You make this choice by deducting the OID in a manner consistent with the method chosen on your timely filed tax return for the tax year in which the loan is issued. Irs gov efile Example. Irs gov efile On January 1, 2013, you took out a $100,000 discounted loan and received $98,500 in proceeds. Irs gov efile The loan will mature on January 1, 2023 (a 10-year term), and the $100,000 principal is payable on that date. Irs gov efile Interest of $10,000 is payable on January 1 of each year, beginning January 1, 2014. Irs gov efile The $1,500 OID on the loan is de minimis because it is less than $2,500 ($100,000 × . Irs gov efile 0025 × 10). Irs gov efile You choose to deduct the OID on a straight-line basis over the term of the loan. Irs gov efile Beginning in 2013, you can deduct $150 each year for 10 years. Irs gov efile Constant-yield method. Irs gov efile   If the OID is not de minimis, you must use the constant-yield method to figure how much you can deduct each year. Irs gov efile You figure your deduction for the first year using the following steps. Irs gov efile Determine the issue price of the loan. Irs gov efile Generally, this equals the proceeds of the loan. Irs gov efile If you paid points on the loan (as discussed later), the issue price generally is the difference between the proceeds and the points. Irs gov efile Multiply the result in (1) by the yield to maturity. Irs gov efile Subtract any qualified stated interest payments from the result in (2). Irs gov efile This is the OID you can deduct in the first year. Irs gov efile   To figure your deduction in any subsequent year, follow the above steps, except determine the adjusted issue price in step (1). Irs gov efile To get the adjusted issue price, add to the issue price any OID previously deducted. Irs gov efile Then follow steps (2) and (3) above. Irs gov efile   The yield to maturity is generally shown in the literature you receive from your lender. Irs gov efile If you do not have this information, consult your lender or tax advisor. Irs gov efile In general, the yield to maturity is the discount rate that, when used in computing the present value of all principal and interest payments, produces an amount equal to the principal amount of the loan. Irs gov efile Example. Irs gov efile The facts are the same as in the previous example, except that you deduct the OID on a constant yield basis over the term of the loan. Irs gov efile The yield to maturity on your loan is 10. Irs gov efile 2467%, compounded annually. Irs gov efile For 2013, you can deduct $93 [($98,500 × . Irs gov efile 102467) − $10,000]. Irs gov efile For 2014, you can deduct $103 [($98,593 × . Irs gov efile 102467) − $10,000]. Irs gov efile Loan or mortgage ends. Irs gov efile   If your loan or mortgage ends, you may be able to deduct any remaining OID in the tax year in which the loan or mortgage ends. Irs gov efile A loan or mortgage may end due to a refinancing, prepayment, foreclosure, or similar event. Irs gov efile If you refinance with the original lender, you generally cannot deduct the remaining OID in the year in which the refinancing occurs, but you may be able to deduct it over the term of the new mortgage or loan. Irs gov efile See Interest paid with funds borrowed from original lender under Interest You Cannot Deduct, later. Irs gov efile Points. Irs gov efile   The term “points” is used to describe certain charges paid, or treated as paid, by a borrower to obtain a loan or a mortgage. Irs gov efile These charges are also called loan origination fees, maximum loan charges, discount points, or premium charges. Irs gov efile If any of these charges (points) are solely for the use of money, they are interest. Irs gov efile   Because points are prepaid interest, you generally cannot deduct the full amount in the year paid. Irs gov efile However, you can choose to fully deduct points in the year paid if you meet certain tests. Irs gov efile For exceptions to the general rule, see Publication 936. Irs gov efile The points reduce the issue price of the loan and result in original issue discount (OID), deductible as explained in the preceding discussion. Irs gov efile Partial payments on a nontax debt. Irs gov efile   If you make partial payments on a debt (other than a debt owed the IRS), the payments are applied, in general, first to interest and any remainder to principal. Irs gov efile You can deduct only the interest. Irs gov efile This rule does not apply when it can be inferred that the borrower and lender understood that a different allocation of the payments would be made. Irs gov efile Installment purchase. Irs gov efile   If you make an installment purchase of business property, the contract between you and the seller generally provides for the payment of interest. Irs gov efile If no interest or a low rate of interest is charged under the contract, a portion of the stated principal amount payable under the contract may be recharacterized as interest (unstated interest). Irs gov efile The amount recharacterized as interest reduces your basis in the property and increases your interest expense. Irs gov efile For more information on installment sales and unstated interest, see Publication 537. Irs gov efile Interest You Cannot Deduct Certain interest payments cannot be deducted. Irs gov efile In addition, certain other expenses that may seem to be interest but are not, cannot be deducted as interest. Irs gov efile You cannot currently deduct interest that must be capitalized, and you generally cannot deduct personal interest. Irs gov efile Interest paid with funds borrowed from original lender. Irs gov efile   If you use the cash method of accounting, you cannot deduct interest you pay with funds borrowed from the original lender through a second loan, an advance, or any other arrangement similar to a loan. Irs gov efile You can deduct the interest expense once you start making payments on the new loan. Irs gov efile   When you make a payment on the new loan, you first apply the payment to interest and then to the principal. Irs gov efile All amounts you apply to the interest on the first loan are deductible, along with any interest you pay on the second loan, subject to any limits that apply. Irs gov efile Capitalized interest. Irs gov efile   You cannot currently deduct interest you are required to capitalize under the uniform capitalization rules. Irs gov efile See Capitalization of Interest, later. Irs gov efile In addition, if you buy property and pay interest owed by the seller (for example, by assuming the debt and any interest accrued on the property), you cannot deduct the interest. Irs gov efile Add this interest to the basis of the property. Irs gov efile Commitment fees or standby charges. Irs gov efile   Fees you incur to have business funds available on a standby basis, but not for the actual use of the funds, are not deductible as interest payments. Irs gov efile You may be able to deduct them as business expenses. Irs gov efile   If the funds are for inventory or certain property used in your business, the fees are indirect costs and you generally must capitalize them under the uniform capitalization rules. Irs gov efile See Capitalization of Interest, later. Irs gov efile Interest on income tax. Irs gov efile   Interest charged on income tax assessed on your individual income tax return is not a business deduction even though the tax due is related to income from your trade or business. Irs gov efile Treat this interest as a business deduction only in figuring a net operating loss deduction. Irs gov efile Penalties. Irs gov efile   Penalties on underpaid deficiencies and underpaid estimated tax are not interest. Irs gov efile You cannot deduct them. Irs gov efile Generally, you cannot deduct any fines or penalties. Irs gov efile Interest on loans with respect to life insurance policies. Irs gov efile   You generally cannot deduct interest on a debt incurred with respect to any life insurance, annuity, or endowment contract that covers any individual unless that individual is a key person. Irs gov efile   If the policy or contract covers a key person, you can deduct the interest on up to $50,000 of debt for that person. Irs gov efile However, the deduction for any month cannot be more than the interest figured using Moody's Composite Yield on Seasoned Corporate Bonds (formerly known as Moody's Corporate Bond Yield Average-Monthly Average Corporates) (Moody's rate) for that month. Irs gov efile Who is a key person?   A key person is an officer or 20% owner. Irs gov efile However, the number of individuals you can treat as key persons is limited to the greater of the following. Irs gov efile Five individuals. Irs gov efile The lesser of 5% of the total officers and employees of the company or 20 individuals. Irs gov efile Exceptions for pre-June 1997 contracts. Irs gov efile   You can generally deduct the interest if the contract was issued before June 9, 1997, and the covered individual is someone other than an employee, officer, or someone financially interested in your business. Irs gov efile If the contract was purchased before June 21, 1986, you can generally deduct the interest no matter who is covered by the contract. Irs gov efile Interest allocated to unborrowed policy cash value. Irs gov efile   Corporations and partnerships generally cannot deduct any interest expense allocable to unborrowed cash values of life insurance, annuity, or endowment contracts. Irs gov efile This rule applies to contracts issued after June 8, 1997, that cover someone other than an officer, director, employee, or 20% owner. Irs gov efile For more information, see section 264(f) of the Internal Revenue Code. Irs gov efile Capitalization of Interest Under the uniform capitalization rules, you generally must capitalize interest on debt equal to your expenditures to produce real property or certain tangible personal property. Irs gov efile The property must be produced by you for use in your trade or business or for sale to customers. Irs gov efile You cannot capitalize interest related to property that you acquire in any other manner. Irs gov efile Interest you paid or incurred during the production period must be capitalized if the property produced is designated property. Irs gov efile Designated property is any of the following. Irs gov efile Real property. Irs gov efile Tangible personal property with a class life of 20 years or more. Irs gov efile Tangible personal property with an estimated production period of more than 2 years. Irs gov efile Tangible personal property with an estimated production period of more than 1 year if the estimated cost of production is more than $1 million. Irs gov efile Property you produce. Irs gov efile   You produce property if you construct, build, install, manufacture, develop, improve, create, raise, or grow it. Irs gov efile Treat property produced for you under a contract as produced by you up to the amount you pay or incur for the property. Irs gov efile Carrying charges. Irs gov efile   Carrying charges include taxes you pay to carry or develop real estate or to carry, transport, or install personal property. Irs gov efile You can choose to capitalize carrying charges not subject to the uniform capitalization rules if they are otherwise deductible. Irs gov efile For more information, see chapter 7. Irs gov efile Capitalized interest. Irs gov efile   Treat capitalized interest as a cost of the property produced. Irs gov efile You recover your interest when you sell or use the property. Irs gov efile If the property is inventory, recover capitalized interest through cost of goods sold. Irs gov efile If the property is used in your trade or business, recover capitalized interest through an adjustment to basis, depreciation, amortization, or other method. Irs gov efile Partnerships and S corporations. Irs gov efile   The interest capitalization rules are applied first at the partnership or S corporation level. Irs gov efile The rules are then applied at the partners' or shareholders' level to the extent the partnership or S corporation has insufficient debt to support the production or construction costs. Irs gov efile   If you are a partner or a shareholder, you may have to capitalize interest you incur during the tax year for the production costs of the partnership or S corporation. Irs gov efile You may also have to capitalize interest incurred by the partnership or S corporation for your own production costs. Irs gov efile To properly capitalize interest under these rules, you must be given the required information in an attachment to the Schedule K-1 you receive from the partnership or S corporation. Irs gov efile Additional information. Irs gov efile   The procedures for applying the uniform capitalization rules are beyond the scope of this publication. Irs gov efile For more information, see sections 1. Irs gov efile 263A-8 through 1. Irs gov efile 263A-15 of the regulations and Notice 88-99. Irs gov efile Notice 88-99 is in Cumulative Bulletin 1988-2. Irs gov efile When To Deduct Interest If the uniform capitalization rules, discussed under Capitalization of Interest, earlier, do not apply to you, deduct interest as follows. Irs gov efile Cash method. Irs gov efile   Under the cash method, you can generally deduct only the interest you actually paid during the tax year. Irs gov efile You cannot deduct a promissory note you gave as payment because it is a promise to pay and not an actual payment. Irs gov efile Prepaid interest. Irs gov efile   You generally cannot deduct any interest paid before the year it is due. Irs gov efile Interest paid in advance can be deducted only in the tax year in which it is due. Irs gov efile Discounted loan. Irs gov efile   If interest or a discount is subtracted from your loan proceeds, it is not a payment of interest and you cannot deduct it when you get the loan. Irs gov efile For more information, see Original issue discount (OID) under Interest You Can Deduct, earlier. Irs gov efile Refunds of interest. Irs gov efile   If you pay interest and then receive a refund in the same tax year of any part of the interest, reduce your interest deduction by the refund. Irs gov efile If you receive the refund in a later tax year, include the refund in your income to the extent the deduction for the interest reduced your tax. Irs gov efile Accrual method. Irs gov efile   Under an accrual method, you can deduct only interest that has accrued during the tax year. Irs gov efile Prepaid interest. Irs gov efile   See Prepaid interest, earlier. Irs gov efile Discounted loan. Irs gov efile   See Discounted loan, earlier. Irs gov efile Tax deficiency. Irs gov efile   If you contest a federal income tax deficiency, interest does not accrue until the tax year the final determination of liability is made. Irs gov efile If you do not contest the deficiency, then the interest accrues in the year the tax was asserted and agreed to by you. Irs gov efile   However, if you contest but pay the proposed tax deficiency and interest, and you do not designate the payment as a cash bond, then the interest is deductible in the year paid. Irs gov efile Related person. Irs gov efile   If you use an accrual method, you cannot deduct interest owed to a related person who uses the cash method until payment is made and the interest is includible in the gross income of that person. Irs gov efile The relationship is determined as of the end of the tax year for which the interest would otherwise be deductible. Irs gov efile See section 267 of the Internal Revenue Code for more information. Irs gov efile Below-Market Loans If you receive a below-market gift or demand loan and use the proceeds in your trade or business, you may be able to deduct the forgone interest. Irs gov efile See Treatment of gift and demand loans, later, in this discussion. Irs gov efile A below-market loan is a loan on which no interest is charged or on which interest is charged at a rate below the applicable federal rate. Irs gov efile A gift or demand loan that is a below-market loan generally is considered an arm's-length transaction in which you, the borrower, are considered as having received both the following. Irs gov efile A loan in exchange for a note that requires the payment of interest at the applicable federal rate. Irs gov efile An additional payment in an amount equal to the forgone interest. Irs gov efile The additional payment is treated as a gift, dividend, contribution to capital, payment of compensation, or other payment, depending on the substance of the transaction. Irs gov efile Forgone interest. Irs gov efile   For any period, forgone interest is The interest that would be payable for that period if interest accrued on the loan at the applicable federal rate and was payable annually on December 31, minus Any interest actually payable on the loan for the period. Irs gov efile Applicable federal rates are published by the IRS each month in the Internal Revenue Bulletin. Irs gov efile Internal Revenue Bulletins are available on the IRS web site at www. Irs gov efile irs. Irs gov efile gov/irb. Irs gov efile You can also contact an IRS office to get these rates. Irs gov efile Loans subject to the rules. Irs gov efile   The rules for below-market loans apply to the following. Irs gov efile Gift loans (below-market loans where the forgone interest is in the nature of a gift). Irs gov efile Compensation-related loans (below-market loans between an employer and an employee or between an independent contractor and a person for whom the contractor provides services). Irs gov efile Corporation-shareholder loans. Irs gov efile Tax avoidance loans (below-market loans where the avoidance of federal tax is one of the main purposes of the interest arrangement). Irs gov efile Loans to qualified continuing care facilities under a continuing care contract (made after October 11, 1985). Irs gov efile   Except as noted in (5) above, these rules apply to demand loans (loans payable in full at any time upon the lender's demand) outstanding after June 6, 1984, and to term loans (loans that are not demand loans) made after that date. Irs gov efile Treatment of gift and demand loans. Irs gov efile   If you receive a below-market gift loan or demand loan, you are treated as receiving an additional payment (as a gift, dividend, etc. Irs gov efile ) equal to the forgone interest on the loan. Irs gov efile You are then treated as transferring this amount back to the lender as interest. Irs gov efile These transfers are considered to occur annually, generally on December 31. Irs gov efile If you use the loan proceeds in your trade or business, you can deduct the forgone interest each year as a business interest expense. Irs gov efile The lender must report it as interest income. Irs gov efile Limit on forgone interest for gift loans of $100,000 or less. Irs gov efile   For gift loans between individuals, forgone interest treated as transferred back to the lender is limited to the borrower's net investment income for the year. Irs gov efile This limit applies if the outstanding loans between the lender and borrower total $100,000 or less. Irs gov efile If the borrower's net investment income is $1,000 or less, it is treated as zero. Irs gov efile This limit does not apply to a loan if the avoidance of any federal tax is one of the main purposes of the interest arrangement. Irs gov efile Treatment of term loans. Irs gov efile   If you receive a below-market term loan other than a gift or demand loan, you are treated as receiving an additional cash payment (as a dividend, etc. Irs gov efile ) on the date the loan is made. Irs gov efile This payment is equal to the loan amount minus the present value, at the applicable federal rate, of all payments due under the loan. Irs gov efile The same amount is treated as original issue discount on the loan. Irs gov efile See Original issue discount (OID) under Interest You Can Deduct, earlier. Irs gov efile Exceptions for loans of $10,000 or less. Irs gov efile   The rules for below-market loans do not apply to any day on which the total outstanding loans between the borrower and lender is $10,000 or less. Irs gov efile This exception applies only to the following. Irs gov efile Gift loans between individuals if the loan is not directly used to buy or carry income-producing assets. Irs gov efile Compensation-related loans or corporation-shareholder loans if the avoidance of any federal tax is not a principal purpose of the interest arrangement. Irs gov efile This exception does not apply to a term loan described in (2) above that was previously subject to the below-market loan rules. Irs gov efile Those rules will continue to apply even if the outstanding balance is reduced to $10,000 or less. Irs gov efile Exceptions for loans without significant tax effect. Irs gov efile   The following loans are specifically exempted from the rules for below-market loans because their interest arrangements do not have a significant effect on the federal tax liability of the borrower or the lender. Irs gov efile Loans made available by lenders to the general public on the same terms and conditions that are consistent with the lender's customary business practices. Irs gov efile Loans subsidized by a federal, state, or municipal government that are made available under a program of general application to the public. Irs gov efile Certain employee-relocation loans. Irs gov efile Certain loans to or from a foreign person, unless the interest income would be effectively connected with the conduct of a U. Irs gov efile S. Irs gov efile trade or business and not exempt from U. Irs gov efile S. Irs gov efile tax under an income tax treaty. Irs gov efile Any other loan if the taxpayer can show that the interest arrangement has no significant effect on the federal tax liability of the lender or the borrower. Irs gov efile Whether an interest arrangement has a significant effect on the federal tax liability of the lender or the borrower will be determined by all the facts and circumstances. Irs gov efile Consider all the following factors. Irs gov efile Whether items of income and deduction generated by the loan offset each other. Irs gov efile The amount of the items. Irs gov efile The cost of complying with the below-market loan provisions if they were to apply. Irs gov efile Any reasons, other than taxes, for structuring the transaction as a below-market loan. Irs gov efile Exception for loans to qualified continuing care facilities. Irs gov efile   The below-market interest rules do not apply to a loan owed by a qualified continuing care facility under a continuing care contract if the lender or lender's spouse is age 62 or older by the end of the calendar year. Irs gov efile A qualified continuing care facility is one or more facilities (excluding nursing homes) meeting the requirements listed below. Irs gov efile Designed to provide services under continuing care contracts (defined below). Irs gov efile Includes an independent living unit, and either an assisted living or nursing facility, or both. Irs gov efile Substantially all of the independent living unit residents are covered by continuing care contracts. Irs gov efile A continuing care contract is a written contract between an individual and a qualified continuing care facility that includes all of the following conditions. Irs gov efile The individual or individual's spouse must be entitled to use the facility for the rest of their life or lives. Irs gov efile The individual or individual's spouse will be provided with housing, as appropriate for the health of the individual or individual's spouse in an: independent living unit (which has additional available facilities outside the unit for the provision of meals and other personal care), and assisted living or nursing facility available in the continuing care facility. Irs gov efile The individual or individual's spouse will be provided with assisted living or nursing care available in the continuing care facility, as required for the health of the individual or the individual's spouse. Irs gov efile For more information, see section 7872(h) of the Internal Revenue Code. Irs gov efile Sale or exchange of property. Irs gov efile   Different rules generally apply to a loan connected with the sale or exchange of property. Irs gov efile If the loan does not provide adequate stated interest, part of the principal payment may be considered interest. Irs gov efile However, there are exceptions that may require you to apply the below-market interest rate rules to these loans. Irs gov efile See Unstated Interest and Original Issue Discount (OID) in Publication 537. Irs gov efile More information. Irs gov efile   For more information on below-market loans, see section 7872 of the Internal Revenue Code and section 1. Irs gov efile 7872-5 of the regulations. 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