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Military Publication 501 - Introductory Material Table of Contents What's New Reminders IntroductionOrdering forms and publications. Military Tax questions. Military Useful Items - You may want to see: What's New Who must file. Military   In some cases, the amount of income you can receive before you must file a tax return has increased. Military Table 1 shows the filing requirements for most taxpayers. Military Exemption amount. Military  The amount you can deduct for each exemption has increased. Military It was $3,800 for 2012. Military It is $3,900 for 2013. Military Exemption phaseout. Military  You lose at least part of the benefit of your exemptions if your adjusted gross income is above a certain amount. Military For 2013, the phaseout begins at $150,000 for married individuals filing separate returns; $250,000 for single individuals; $275,000 for heads of household; and $300,000 for married individuals filing joint returns or qualifying widow(er)s. Military See Phaseout of Exemptions , later. Military Standard deduction increased. Military   The standard deduction for some taxpayers who do not itemize their deductions on Schedule A of Form 1040 is higher for 2013 than it was for 2012. Military The amount depends on your filing status. Military You can use the 2013 Standard Deduction Tables near the end of this publication to figure your standard deduction. Military Same-sex marriages. Military . Military  If you have a same-sex spouse whom you legally married in a state (or foreign country) that recognizes same-sex marriage, you and your spouse generally must use the married filing jointly or married filing separately filing status on your 2013 return, even if you and your spouse now live in a state (or foreign country) that does not recognize same-sex marriage. Military See Same-sex marriage under Marital Status, later. Military If you meet certain requirements, you may be able to file amended returns to change your filing status for some earlier years. Military For details on filing amended returns, see Joint Return After Separate Returns . Military Reminders Future developments. Military  Information about any future developments affecting Publication 501 (such as legislation enacted after we release it) will be posted at www. Military irs. Military gov/pub501. Military Taxpayer identification number for aliens. Military   If you are a nonresident or resident alien and you do not have and are not eligible to get a social security number (SSN), you must apply for an individual taxpayer identification number (ITIN). Military Your spouse also may need an ITIN if he or she does not have and is not eligible to get an SSN. Military See Form W-7, Application for IRS Individual Taxpayer Identification Number. Military Also, see Social Security Numbers for Dependents , later. Military Photographs of missing children. Military   The Internal Revenue Service is a proud partner with the National Center for Missing and Exploited Children. Military Photographs of missing children selected by the Center may appear in this publication on pages that would otherwise be blank. Military You can help bring these children home by looking at the photographs and calling 1-800-THE-LOST (1-800-843-5678) if you recognize a child. Military Introduction This publication discusses some tax rules that affect every person who may have to file a federal income tax return. Military It answers some basic questions: who must file; who should file; what filing status to use; how many exemptions to claim; and the amount of the standard deduction. Military Who Must File explains who must file an income tax return. Military If you have little or no gross income, reading this section will help you decide if you have to file a return. Military Who Should File helps you decide if you should file a return, even if you are not required to do so. Military Filing Status helps you determine which filing status to use. Military Filing status is important in determining whether you must file a return and whether you may claim certain deductions and credits. Military It also helps determine your standard deduction and tax rate. Military Exemptions, which reduce your taxable income, are discussed in Exemptions . Military Exemptions for Dependents explains the difference between a qualifying child and a qualifying relative. Military Other topics include the social security number requirement for dependents, the rules for multiple support agreements, and the rules for divorced or separated parents. Military Phaseout of Exemptions explains how to determine whether you must reduce the dollar amount of exemptions you claim and, if so, the amount of the reduction. Military Standard Deduction gives the rules and dollar amounts for the standard deduction — a benefit for taxpayers who do not itemize their deductions. Military This section also discusses the standard deduction for taxpayers who are blind or age 65 or older, as well as special rules that limit the standard deduction available to dependents. Military In addition, this section helps you decide whether you would be better off taking the standard deduction or itemizing your deductions. Military How To Get Tax Help explains how to get tax help from the IRS. Military This publication is for U. Military S. Military citizens and resident aliens only. Military If you are a resident alien for the entire year, you must follow the same tax rules that apply to U. Military S. Military citizens. Military The rules to determine if you are a resident or nonresident alien are discussed in chapter 1 of Publication 519, U. Military S. Military Tax Guide for Aliens. Military Nonresident aliens. Military    If you were a nonresident alien at any time during the year, the rules and tax forms that apply to you may be different from those that apply to U. Military S. Military citizens. Military See Publication 519. Military Comments and suggestions. Military    We welcome your comments about this publication and your suggestions for future editions. Military   You can write to us at the following address: Internal Revenue Service Tax Forms and Publications Division 1111 Constitution Ave. Military NW, IR-6526 Washington, DC 20224   We respond to many letters by telephone. Military Therefore, it would be helpful if you would include your daytime phone number, including the area code, in your correspondence. Military   You can send your comments from www. Military irs. Military gov/formspubs. Military Click on “More Information” and then on “Comment on Tax Forms and Publications. Military ”   Although we cannot respond individually to each comment received, we do appreciate your feedback and will consider your comments as we revise our tax products. Military Ordering forms and publications. Military    Visit www. Military irs. Military gov/formspubs to download forms and publications, call 1-800-TAX-FORM (1-800-829-3676), or write to the address below and receive a response within 10 days after your request is received. Military Internal Revenue Service 1201 N. Military Mitsubishi Motorway Bloomington, IL 61705-6613 Tax questions. Military    If you have a tax question, check the information available on IRS. Military gov or call 1-800-829-1040. Military We cannot answer tax questions sent to either of the above addresses. Military Useful Items - You may want to see: Publication 559 Survivors, Executors, and Administrators 929 Tax Rules for Children and Dependents Form (and Instructions) 1040X Amended U. Military S. Military Individual Income Tax Return 2848 Power of Attorney and Declaration of Representative 8332 Release/Revocation of Release of Claim to Exemption for Child by Custodial Parent 8814 Parents' Election To Report Child's Interest and Dividends Prev  Up  Next   Home   More Online Publications
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Military 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. Military Adjustment for premium. Military Adjustment for acquisition premium. Military Adjustment for market discount. Military 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. Military “Original issue discount” is defined first. Military The other terms are listed alphabetically. Military Original issue discount (OID). Military   OID is a form of interest. Military 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). Military Zero coupon bonds and debt instruments that pay no stated interest until maturity are examples of debt instruments that have OID. Military Accrual period. Military   An accrual period is an interval of time used to measure OID. Military The length of an accrual period can be 6 months, a year, or some other period, depending on when the debt instrument was issued. Military Acquisition premium. Military   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. Military A debt instrument does not have acquisition premium, however, if the debt instrument was purchased at a premium. Military See Premium, later. Military Adjusted issue price. Military   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. Military In general, the adjusted issue price at the beginning of the debt instrument's first accrual period is its issue price. Military 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. Military Debt instrument. Military   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). Military It generally does not include an annuity contract. Military Issue price. Military   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. Military Market discount. Military   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. Military 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. Military The market discount is the difference between the issue price plus accrued OID and your adjusted basis. Military Premium. Military   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. Military The premium is the excess of the adjusted basis over the payable amounts. Military See Publication 550 for information on the tax treatment of bond premium. Military Qualified stated interest. Military   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. Military Stated redemption price at maturity. Military   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. Military Yield to maturity (YTM). Military   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. Military The YTM is generally shown on the face of the debt instrument or in the literature you receive from your broker. Military If you do not have this information, consult your broker, tax advisor, or the issuer. Military 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. Military 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. Military The OID amounts listed are figured without reference to the price or date at which you acquired the debt instrument. Military 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. Military The following discussions explain what information is contained in each section of the list. Military Section I. Military   This section contains publicly offered, long-term debt instruments. Military Section I-A: Corporate Debt Instruments Issued Before 1985. Military Section I-B: Corporate Debt Instruments Issued After 1984. Military Section I-C: Inflation-Indexed Debt Instruments. Military For each publicly offered debt instrument in Section I, the list contains the following information. Military The name of the issuer. Military The Committee on Uniform Security Identification Procedures (CUSIP) number. Military The issue date. Military The maturity date. Military The issue price expressed as a percent of principal or of stated redemption price at maturity. Military The annual stated or coupon interest rate. Military (This rate is shown as 0. Military 00 if no annual interest payments are provided. Military ) The yield to maturity will be added to Section I-B for bonds issued after December 31, 2006. Military The total OID accrued up to January 1 of a calendar year. Military (This information is not available for every instrument. Military ) 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. Military The total OID per $1,000 of principal or maturity value for a calendar year and a subsequent year. Military Section II. Military   This section contains stripped coupons and principal components of U. Military S. Military Treasury and Government-Sponsored Enterprise debt instruments. Military 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. Military This section also includes debt instruments backed by U. Military S. Military Treasury securities that represent ownership interests in those securities. Military   The obligations listed in Section II are arranged by maturity date. Military The amounts listed are the total OID for a calendar year per $1,000 of redemption price. Military Section III. Military   This section contains short-term discount obligations. Military Section III-A: Short-Term U. Military S. Military Treasury Bills. Military Section III-B: Federal Home Loan Banks. Military Section III-C: Federal National Mortgage Association. Military Section III-D: Federal Farm Credit Banks. Military Section III-E: Federal Home Loan Mortgage Corporation. Military Section III-F: Federal Agricultural Mortgage Corporation. Military    Information that supplements Section III-A is available on the Internet at http://www. Military treasurydirect. Military gov/tdhome. Military htm. Military   The short-term obligations listed in this section are arranged by maturity date. Military 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. Military 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. Military Debt Instruments Not on the OID List The list of debt instruments discussed earlier does not contain the following items. Military U. Military S. Military savings bonds. Military Certificates of deposit and other face-amount certificates issued at a discount, including syndicated certificates of deposit. Military Obligations issued by tax-exempt organizations. Military OID debt instruments that matured or were entirely called by the issuer before the tables were posted on the IRS website. Military Mortgage-backed securities and mortgage participation certificates. Military Long-term OID debt instruments issued before May 28, 1969. Military Short-term obligations, other than the obligations listed in Section III. Military Debt instruments issued at a discount by states or their political subdivisions. Military REMIC regular interests and CDOs. Military Commercial paper and banker's acceptances issued at a discount. Military Obligations issued at a discount by individuals. Military Foreign obligations not traded in the United States and obligations not issued in the United States. Military 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. Military 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. Military 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. Military See Backup Withholding, later. Military 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. Military 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). Military Electronic payee statements. Military   You can issue Form 1099-OID electronically with the consent of the recipient. Military More information. Military   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. Military 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. Military 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. Military If you sell the obligation for the owner before maturity, you must file Form 1099-B to reflect the gross proceeds to the seller. Military Do not report the accrued discount to the date of sale on either Form 1099-INT or Form 1099-OID. Military 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. Military A special rule is used to determine the original issue price for information reporting on U. Military S. Military Treasury bills (T-bills) listed in Section III-A. Military 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. Military This noncompetitive discount price is the issue price (expressed as a percent of principal) shown in Section III-A. Military 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. Military Example 1. Military There are 13-week and 26-week T-bills maturing on the same date as the T-bill being redeemed. Military The price actually paid by the owner cannot be established by owner or middleman records. Military 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. Military The interest you report on Form 1099-INT is the OID (per $1,000 of principal) shown in Section III-A for that obligation. Military 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. Military For this purpose, you can rely on Section I of the OID list to determine the following information. Military Whether a debt instrument has OID. Military The OID to be reported on the Form 1099-OID. Military In general, you must report OID on publicly offered, long-term debt instruments listed in Section I. Military You also can report OID on other long-term debt instruments. Military Form 1099-OID. Military   On Form 1099-OID for a calendar year show the following information. Military Box 1. Military The OID for the actual dates the owner held the debt instruments during a calendar year. Military To determine this amount, see Figuring OID, next. Military Box 2. Military The qualified stated interest paid or credited during the calendar year. Military Interest reported here is not reported on Form 1099-INT. Military The qualified stated interest on Treasury inflation-protected securities may be reported on Form 1099-INT in box 3 instead. Military Box 3. Military Any interest or principal forfeited because of an early withdrawal that the owner can deduct from gross income. Military Do not reduce the amounts in boxes 1 and 2 by the forfeiture. Military Box 4. Military Any backup withholding for this debt instrument. Military Box 7. Military The CUSIP number, if any. Military 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. Military 50 2006). Military If the issuer of the debt instrument is other than the payer, show the name of the issuer in this box. Military Box 8. Military The OID on a U. Military S. Military Treasury obligation for the part of the year the owner held the debt instrument. Military Box 9. Military Investment expenses passed on to holders of a single-class REMIC. Military Boxes 10-12. Military Use to report any state income tax withheld for this debt instrument. Military Figuring OID. Military   You can determine the OID on a long-term debt instrument by using either of the following. Military Section I of the OID list. Military The income tax regulations. Military Using Section I. Military   If the owner held the debt instrument for the entire calendar year, report the OID shown in Section I for the calendar year. Military 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. Military For example, if the debt instrument's stated redemption price at maturity is $500, report one-half the listed OID. Military   If the owner held the debt instrument for less than the entire calendar year, figure the OID to report as follows. Military Look up the daily OID for the first accrual period in the calendar year during which the owner held the debt instrument. Military Multiply the daily OID by the number of days the owner held the debt instrument during that accrual period. Military Repeat steps (1) and (2) for any remaining accrual periods for the year during which the owner held the debt instrument. Military Add the results in steps (2) and (3) to determine the owner's OID per $1,000 of stated redemption price at maturity. Military If necessary, adjust the OID in (4) to reflect the debt instrument's stated redemption price at maturity. Military Report the result on Form 1099-OID in box 1. Military Using the income tax regulations. Military   Instead of using Section I to figure OID, you can use the regulations under sections 1272 through 1275 of the Internal Revenue Code. Military 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. Military (If you use Section I-B, the OID is figured using 6-month accrual periods. Military )   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. Military 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. Military You must file an information return showing the reportable interest and OID, if any, on the CD. Military These rules apply whether or not you sold the CD to the owner. Military Report OID on a CD in the same way as OID on other debt instruments. Military See Short-Term Obligations Redeemed at Maturity and Long-Term Debt Instruments, earlier. Military 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. Military However, do not report the interest if either of the following apply. Military You hold the bond as a nominee for the true owner. Military The payee is a foreign person. Military See Payments to foreign person under Backup Withholding, later. Military 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. Military The coupon may have been “stripped” (separated) from the bond and separately purchased. Military 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. Military 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%. Military The backup withholding is deducted at the time a cash payment is made. Military See Pub. Military 1281, Backup Withholding for Missing and Incorrect Name/TIN(s), for more information. Military Backup withholding generally applies in the following situations. Military The payee does not give you a taxpayer identification number (TIN). Military The IRS notifies you that the payee gave an incorrect TIN. Military The IRS notifies you that the payee is subject to backup withholding due to payee underreporting. Military 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. Military However, for short-term discount obligations (other than government obligations), bearer bonds and coupons, and U. Military S. Military 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. Military Short-term obligations. Military   Backup withholding applies to OID on a short-term obligation only when the OID is paid at maturity. Military However, backup withholding applies to any interest payable before maturity when the interest is paid or credited. Military   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. Military 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. Military If the purchase price of a listed obligation is not established or is disregarded, you must use the issue price shown in Section III. Military Long-term obligations. Military   If no cash payments are made on a long-term obligation before maturity, backup withholding applies only at maturity. Military The amount subject to backup withholding is the OID includible in the owner's gross income for the calendar year when the obligation matures. Military The amount to be withheld is limited to the cash paid. Military Registered long-term obligations with cash payments. Military   If a registered long-term obligation has cash payments before maturity, backup withholding applies when a cash payment is made. Military 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. Military 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. Military For any payment, the required withholding is limited to the cash paid. Military Payee not the original owner. Military   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). Military The amount subject to backup withholding at maturity of a listed obligation must be determined using the issue price shown in Section I. Military Bearer long-term obligations with cash payments. Military   If a bearer long-term obligation has cash payments before maturity, backup withholding applies when the cash payments are made. Military 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. Military 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. Military The required withholding at maturity is limited to the cash paid. Military Sales and redemptions. Military   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. Military Backup withholding applies in the following situations. Military The payee does not give you a TIN. Military The IRS notifies you that the payee gave an incorrect TIN. Military 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. Military Payments outside the United States to U. Military S. Military person. Military   The requirements for backup withholding and information reporting apply to payments of OID and interest made outside the United States to a U. Military S. Military 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. Military S. Military trade or business. Military Payments to foreign person. Military   The following discussions explain the rules for backup withholding and information reporting on payments to foreign persons. Military U. Military S. Military -source amount. Military   Backup withholding and information reporting are not required for payments of U. Military S. Military -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. Military A U. Military S. Military resident is not a foreign person. Military 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. Military 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. Military S. Military person. Military   For information about the 28% withholding tax that may apply to payments of U. Military S. Military -source OID or interest to foreign persons, see Publication 515. Military Foreign-source amount. Military   Backup withholding and information reporting are not required for payments of foreign-source OID and interest made outside the United States. Military 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. Military More information. Military   For more information about backup withholding and information reporting on foreign-source amounts or payments to foreign persons, see Regulations section 1. Military 6049-5. Military Information for Owners of OID Debt Instruments This section is for persons who prepare their own tax returns. Military It discusses the income tax rules for figuring and reporting OID on long-term debt instruments. Military 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. Military However, the information provided does not cover every situation. Military More information can be found in the regulations under sections 1271 through 1275 of the Internal Revenue Code. Military Including OID in income. Military   Generally, you include OID in income as it accrues each year, whether or not you receive any payments from the debt instrument issuer. Military Exceptions. Military   The rules for including OID in income as it accrues generally do not apply to the following debt instruments. Military U. Military S. Military savings bonds. Military Tax-exempt obligations. Military (However, see Tax-Exempt Bonds and Coupons, later. Military ) Obligations issued by individuals before March 2, 1984. Military Loans of $10,000 or less between individuals who are not in the business of lending money. Military (The dollar limit includes outstanding prior loans by the lender to the borrower. Military ) This exception does not apply if a principal purpose of the loan is to avoid any federal tax. Military   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. Military Publication 550 also discusses rules for holders of REMIC interests and CDOs. Military De minimis rule. Military   You can treat OID as zero if the total OID on a debt instrument is less than one-fourth of 1% (. Military 0025) of the stated redemption price at maturity multiplied by the number of full years from the date of original issue to maturity. Military Debt instruments with de minimis OID are not listed in this publication. Military 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. Military Also, the de minimis rules generally do not apply to tax-exempt obligations. Military Example 2. Military 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. Military 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. Military Under the de minimis rule, you can treat the OID as zero because the $20 discount is less than $25. Military Example 3. Military Assume the same facts as Example 2, except the debt instrument was issued at $950. Military You must report part of the $50 OID each year because it is more than $25. Military Choice to report all interest as OID. Military   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. Military See Constant yield method under Debt Instruments Issued After 1984, later, for more information. Military   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. Military For more information, see Regulations section 1. Military 1272-3. Military Purchase after date of original issue. Military   A debt instrument you purchased after the date of original issue may have premium, acquisition premium, or market discount. Military If so, the OID reported to you on Form 1099-OID may have to be adjusted. Military For more information, see Showing an OID adjustment under How To Report OID, later. Military The following rules generally do not apply to contingent payment debt instruments. Military Adjustment for premium. Military   If your debt instrument (other than an inflation-indexed debt instrument) has premium, do not report any OID as ordinary income. Military Your adjustment is the total OID shown on your Form 1099-OID. Military Adjustment for acquisition premium. Military   If your debt instrument has acquisition premium, reduce the OID you report. Military 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. Military Adjustment for market discount. Military   If your debt instrument has market discount that you choose to include in income currently, increase the OID you report. Military Your adjustment is the accrued market discount for the year. Military 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. Military If you choose to use the constant yield method to figure accrued market discount, also see Figuring OID on Long-Term Debt Instruments, later. Military The constant yield method of figuring accrued OID, explained in those discussions under Constant yield method, is also used to figure accrued market discount. Military For more information concerning premium or market discount on an inflation-indexed debt instrument, see Regulations section 1. Military 1275-7. Military Sale, exchange, or redemption. Military   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. Military If you sold the debt instrument through a broker, you should receive Form 1099-B or an equivalent statement from the broker. Military Use the Form 1099-B or other statement and your brokerage statements to complete Form 8949, and Schedule D (Form 1040). Military   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. Military Your basis, generally, is your cost increased by the OID you have included in income each year you held it. Military 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. Military   See chapter 4 of Publication 550 for more information about the tax treatment of the sale or redemption of discounted debt instruments. Military Example 4. Military Larry, a calendar year taxpayer, bought a corporate debt instrument at original issue for $86,235. Military 00 on November 1 of Year 1. Military The 15-year debt instrument matures on October 31 of Year 16 at a stated redemption price of $100,000. Military The debt instrument provides for semiannual payments of interest at 10%. Military Assume the debt instrument is a capital asset in Larry's hands. Military The debt instrument has $13,765. Military 00 of OID ($100,000 stated redemption price at maturity minus $86,235. Military 00 issue price). Military Larry sold the debt instrument for $90,000 on November 1 of Year 4. Military Including the OID he will report for the period he held the debt instrument in Year 4, Larry has included $4,556. Military 00 of OID in income and has increased his basis by that amount to $90,791. Military 00. Military Larry has realized a loss of $791. Military 00. Military All of Larry's loss is capital loss. Military 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. Military Form 1099-OID shows all OID income in box 1 except OID on a U. Military S. Military Treasury obligation, which is shown in box 8. Military It also shows, in box 2, any qualified stated interest you must include in income. Military (However, any qualified stated interest on Treasury inflation-protected securities can be reported on Form 1099-INT in box 3. Military ) A copy of Form 1099-OID will be sent to the IRS. Military Do not attach your copy to your tax return. Military Keep it for your records. Military 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. Military 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. Military Form 1099-OID not received. Military   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. Military Refiguring OID. Military   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. Military You bought the debt instrument at a premium or at an acquisition premium. Military The debt instrument is a stripped bond or coupon (including zero coupon bonds backed by U. Military S. Military Treasury securities). Military The debt instrument is a contingent payment or inflation-indexed debt instrument. Military See the discussions under Figuring OID on Long-Term Debt Instruments or Figuring OID on Stripped Bonds and Coupons, later, for the specific computations. Military Refiguring interest. Military   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. Military Nominee. Military   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. Military ” You must file another Form 1099-OID for each actual owner, showing the OID for the owner. Military Show the owner of the debt instrument as the “recipient” and you as the “payer. Military ”   Complete Form 1099-OID and Form 1096 and file the forms with the Internal Revenue Service Center for your area. Military You must also give a copy of the Form 1099-OID to the actual owner. Military However, you are not required to file a nominee return to show amounts belonging to your spouse. Military See the Form 1099 instructions for more information. Military   When preparing your tax return, follow the instructions under Showing an OID adjustment in the next discussion. Military 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. Military Form 1040 or Form 1040A required. Military   You must use Form 1040 or Form 1040A (you cannot use Form 1040EZ) under either of the following conditions. Military You received a Form 1099-OID as a nominee for the actual owner. Military Your total interest and OID income for the year was more than $1,500. Military Form 1040 required. Military   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. Military 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. Military Also, you must use Form 1040 if you were charged an early withdrawal penalty. Military Where to report. Military   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. Military Include all OID and periodic interest shown on any Form 1099-OID, boxes 1, 2, and 8, you received for the tax year. Military Also include any other OID and interest income for which you did not receive a Form 1099. Military Showing an OID adjustment. Military   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. Military   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. Military If the OID, as adjusted, is less than the amount shown on Form 1099-OID, show the adjustment as follows. Military Under your last entry on line 1, subtotal all interest and OID income listed on line 1. Military Below the subtotal, write “Nominee Distribution” or “OID Adjustment” and show the OID you are not required to report. Military Subtract that OID from the subtotal and enter the result on line 2. Military If the OID, as adjusted, is more than the amount shown on Form 1099-OID, show the adjustment as follows. Military Under your last entry on line 1, subtotal all interest and OID income listed on line 1. Military Below the subtotal, write “OID Adjustment” and show the additional OID. Military Add that OID to the subtotal and enter the result on line 2. Military 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. Military It also may depend on the type of the debt instrument. Military There are different rules for each of the following debt instruments. Military Corporate debt instruments issued after 1954 and before May 28, 1969, and government debt instruments issued after 1954 and before July 2, 1982. Military Corporate debt instruments issued after May 27, 1969, and before July 2, 1982. Military Debt instruments issued after July 1, 1982, and before 1985. Military Debt instruments issued after 1984 (other than debt instruments described in (5) and (6)). Military Contingent payment debt instruments issued after August 12, 1996. Military Inflation-indexed debt instruments (including Treasury inflation-protected securities) issued after January 5, 1997. Military Zero coupon bonds. Military   The rules for figuring OID on zero coupon bonds backed by U. Military S. Military Treasury securities are discussed under Figuring OID on Stripped Bonds and Coupons, later. Military 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. Military The OID, which is taxed as ordinary income, generally equals the following amount. Military   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. Military If there is a loss on the sale of the debt instrument, the entire loss is a capital loss and no OID is reported. Military 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. Military For information about showing the correct OID on your tax return, see the discussion under How To Report OID, earlier. Military Your basis in the debt instrument is increased by the OID you include in income. Military Form 1099-OID. Military   You should receive a Form 1099-OID showing OID for the part of the year you held the debt instrument. Military However, if you paid an acquisition premium, you may need to refigure the OID to report on your tax return. Military See Reduction for acquisition premium, later. Military 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. Military irs. Military gov/pub1212 by clicking the link under Recent Developments. Military Form 1099-OID not received. Military    The OID listed is for each $1,000 of redemption price. Military You must adjust the listed amount if your debt instrument has a different principal amount. Military For example, if you have a debt instrument with a $500 principal amount, use one-half the listed amount to figure your OID. Military   If you held the debt instrument the entire year, use the OID shown in Section I-A for a calendar year. Military (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. Military ) If you did not hold the debt instrument the entire year, figure your OID using the following method. Military Divide the OID shown by 12. Military 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. Military This is the OID to include in income unless you paid an acquisition premium. Military The reduction for acquisition premium is discussed next. Military Reduction for acquisition premium. Military   If you bought the debt instrument at an acquisition premium, figure the OID to include in income as follows. Military 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. Military This is the monthly OID. Military Subtract from your cost the issue price and the accumulated OID from the date of issue to the date of purchase. Military (If the result is zero or less, stop here. Military You did not pay an acquisition premium. Military ) 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. Military Subtract the amount figured in (3) from the amount figured in (1). Military This is the OID to include in income for each month you hold the debt instrument during the year. Military Transfers during the month. Military   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. Military Your holding period for this purpose begins the day you acquire the debt instrument and ends the day before you dispose of it. Military 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. Military For information about showing the correct OID on your tax return, see How To Report OID, earlier. Military Form 1099-OID. Military   You should receive a Form 1099-OID showing OID for the part of the year you held the debt instrument. Military However, if you paid an acquisition premium, you may need to refigure the OID to report on your tax return. Military See Constant yield method and the discussions on acquisition premium that follow, later. Military 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. Military irs. Military gov/pub1212 by clicking the link under Recent Developments. Military Form 1099-OID not received. Military    The OID listed is for each $1,000 of redemption price. Military You must adjust the listed amount if your debt instrument has a different principal amount. Military For example, if you have a debt instrument with a $500 principal amount, use one-half the listed amount to figure your OID. Military   If you held the debt instrument the entire year, use the OID shown in Section I-A. Military (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. Military ) If you did not hold the debt instrument the entire year, figure your OID using either of the following methods. Military Method 1. Military    Divide the total OID for a calendar year by 365 (366 for leap years). Military Multiply the result in (1) by the number of days you held the debt instrument during that particular year. Military  This computation is an approximation and may result in a slightly higher OID than Method 2. Military Method 2. Military    Look up the daily OID for the first accrual period you held the debt instrument during a calendar year. Military (See Accrual period under Constant yield method, next. Military ) Multiply the daily OID by the number of days you held the debt instrument during that accrual period. Military If you held the debt instrument for part of both accrual periods, repeat (1) and (2) for the second accrual period. Military Add the results of (2) and (3). Military This is the OID to include in income, unless you paid an acquisition premium. Military (The reduction for acquisition premium is discussed later. Military ) Constant yield method. Military   This discussion shows how to figure OID on debt instruments issued after July 1, 1982, and before 1985, using a constant yield method. Military OID is allocated over the life of the debt instrument through adjustments to the issue price for each accrual period. Military   Figure the OID allocable to any accrual period as follows. Military Multiply the adjusted issue price at the beginning of the accrual period by the debt instrument's yield to maturity. Military Subtract from the result in (1) any qualified stated interest allocable to the accrual period. Military Accrual period. Military   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. Military Your tax year will usually include parts of two accrual periods. Military Daily OID. Military   The OID for any accrual period is allocated equally to each day in the accrual period. Military You must include in income the sum of the OID amounts for each day you hold the debt instrument during the year. Military If your tax year includes parts of two or more accrual periods, you must include the proper daily OID amounts for each accrual period. Military Figuring daily OID. Military   The daily OID for the initial accrual period is figured using the following formula. Military   (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. Military Reduction for acquisition premium on debt instruments purchased before July 19, 1984. Military   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. Military 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. Military Reduction for acquisition premium on debt instruments purchased after July 18, 1984. Military   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. Military However, the method of figuring the daily acquisition premium is different from the method described in the preceding discussion. Military To figure the daily acquisition premium under this method, multiply the daily OID by the following fraction. Military The numerator is the acquisition premium. Military The denominator is the total OID remaining for the debt instrument after your purchase date. Military Section I-A is available at www. Military irs. Military gov/pub1212 and clicking the link under Recent Developments. Military Using Section I-A to figure accumulated OID. Military   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. Military The amount from the “Total OID to January 1, YYYY” column for your debt instrument. Military The OID from January 1 of a calendar year to the date of purchase, figured as follows. Military 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. Military 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. Military Add the amounts figured in (2a) and (2b). Military 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. Military You must include the OID in gross income whether or not you hold the debt instrument as a capital asset. Military Your basis in the debt instrument is increased by the OID you include in income. Military For information about showing the correct OID on your tax return, see How To Report OID, earlier. Military Form 1099-OID. Military   You should receive a Form 1099-OID showing OID for the part of a calendar year you held the debt instrument. Military However, if you paid an acquisition premium, you may need to refigure the OID to report on your tax return. Military See Constant yield method and Reduction for acquisition premium, later. Military   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. Military See Contingent Payment Debt Instruments or Inflation-Indexed Debt Instruments, later. Military 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. Military irs. Military gov/pub1212 by clicking the link under Recent Developments. Military Form 1099-OID not received. Military   The OID listed is for each $1,000 of redemption price. Military You must adjust the listed amount if your debt instrument has a different principal amount. Military For example, if you have a debt instrument with a $500 principal amount, use one-half the listed amount to figure your OID. Military   Use the OID shown in Section I-B for a calendar year if you held the debt instrument the entire year. Military (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. Military ) If you did not hold the debt instrument the entire year, figure your OID as follows. Military Look up the daily OID for the first accrual period in which you held the debt instrument during a calendar year. Military (See Accrual period under Constant yield method, later. Military ) Multiply the daily OID by the number of days you held the debt instrument during that accrual period. Military Repeat (1) and (2) for any remaining accrual periods in which you held the debt instrument. Military Add the results of (2) and (3). Military This is the OID to include in income for that year, unless you paid an acquisition premium. Military (The reduction for acquisition premium is discussed later. Military ) Tax-exempt bond. Military   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. Military You need to make this adjustment to determine if you have a gain or loss on a later disposition of the bond. Military In general, use the rules that follow to determine your OID. Military Constant yield method. Military   This discussion shows how to figure OID on debt instruments issued after 1984 using a constant yield method. Military (The special rules that apply to contingent payment debt instruments and inflation-indexed debt instruments are explained later. Military ) OID is allocated over the life of the debt instrument through adjustments to the issue price for each accrual period. Military   Figure the OID allocable to any accrual period as follows. Military Multiply the adjusted issue price at the beginning of the accrual period by a fraction. Military The numerator of the fraction is the debt instrument's yield to maturity and the denominator is the number of accrual periods per year. Military The yield must be stated appropriately taking into account the length of the particular accrual period. Military Subtract from the result in (1) any qualified stated interest allocable to the accrual period. Military Accrual period. Military   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. Military For example, a debt instrument maturing on March 31 has accrual periods that end on September 30 and March 31 of each calendar year. Military Any short period is included as the first accrual period. Military   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. Military However, the OID listed for these debt instruments in Section I-B has been figured using 6-month accrual periods. Military Daily OID. Military   The OID for any accrual period is allocated equally to each day in the accrual period. Military Figure the amount to include in income by adding the OID for each day you hold the debt instrument during the year. Military 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. Military 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. Military Figuring daily OID. Military   The daily OID for the initial accrual period is figured using the following formula. Military   (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. Military Example 5. Military On January 1 of Year 1, you bought a 15-year, 10% debt instrument of A Corporation at original issue for $86,235. Military 17. Military According to the prospectus, the debt instrument matures on December 31 of Year 15 at a stated redemption price of $100,000. Military The yield to maturity is 12%, compounded semiannually. Military The debt instrument provides for qualified stated interest payments of $5,000 on June 30 and December 31 of each calendar year. Military The accrual periods are the 6-month periods ending on each of these dates. Military The number of days for the first accrual period (January 1 through June 30) is 181 days (182 for leap years). Military The daily OID for the first accrual period is figured as follows. Military   ($86,235. Military 17 x . Military 12/2) – $5,000     181 days     = $174. Military 11020 = $. Military 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. Military 17 + $174. Military 11), or $86,409. Military 28. Military The number of days for the second accrual period (July 1 through December 31) is 184 days. Military The daily OID for the second accrual period is figured as follows. Military   ($86,409. Military 28 x . Military 12/2) – $5,000     184 days     = $184. Military 55681 = $1. Military 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, $174. Military 11 ($. Military 95665 × 182 days) plus $184. Military 56 ($1. Military 00303 × 184 days), or $358. Military 67. Military Add the OID to the $10,000 interest you report on your income tax return for Year 1. Military Example 6. Military 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. Military Also, the interest payment dates are October 31 and April 30 of each calendar year. Military The accrual periods are the 6-month periods ending on each of these dates. Military The number of days for the first accrual period (May 1 through October 31) is 184 days. Military The daily OID for the first accrual period is figured as follows. Military   ($86,235. Military 17 x . Military 12/2) – $5,000     184 days     = $174. Military 11020 = $. Military 94625   184           The number of days for the second accrual period (November 1 through April 30) is 181 days (182 for leap years). Military The daily OID for the second accrual period is figured as follows. Military   ($86,409. Military 28 x . Military 12/2) – $5,000     181 days     = $184. Military 55681 = $1. Military 01965   181 If you hold the debt instrument through the end of Year 1, you must include $236. Military 31 of OID in income. Military This is $174. Military 11 ($. Military 94625 × 184 days) for the period May 1 through October 31 plus $62. Military 20 ($1. Military 01965 × 61 days) for the period November 1 through December 31. Military The OID is added to the $5,000 interest income paid on October 31 of Year 1. Military Your basis in the debt instrument is increased by the OID you include in income. Military On January 1 of Year 2, your basis in the A Corporation debt instrument is $86,471. Military 48 ($86,235. Military 17 + $236. Military 31). Military Short first accrual period. Military   You may have to make adjustments if a debt instrument has a short first accrual period. Military 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. Military (The remaining accrual periods begin on May 1 and November 1. Military ) For this short period, figure the daily OID as described earlier, but adjust the yield for the length of the short accrual period. Military You may use any reasonable compounding method in determining OID for a short period. Military Examples of reasonable compounding methods include continuous compounding and monthly compounding (that is, simple interest within a month). Military Consult your tax advisor for more information about making this computation. Military   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. Military Reduction for acquisition premium. Military   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. Military To figure the daily acquisition premium, multiply the daily OID by the following fraction. Military The numerator is the acquisition premium. Military The denominator is the total OID remaining for the debt instrument after your purchase date. Military Example 7. Military 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. Military The adjusted issue price on November 1 of Year 1 is $86,409. Military 28 ($86,235. Military 17 + $174. Military 11). Military In this case, you paid an acquisition premium of $590. Military 72 ($87,000 − $86,409. Military 28). Military The daily OID for the accrual period November 1 through April 30, reduced for the acquisition premium, is figured as follows. Military 1) Daily OID on date of purchase (2nd accrual period) $1. Military 01965*  2)  Acquisition premium $590. Military 72    3)  Total OID remaining after purchase date ($13,764. Military 83 − $174. Military 11) 13,590. Military 72   4) Line 2 ÷ line 3 . Military 04346  5)  Line 1 × line 4 . Military 04432  6)  Daily OID reduced for the acquisition premium. Military Line 1 − line 5 $0. Military 97533  * As shown in Example 6. Military The total OID to include in income for Year 1 is $59. Military 50 ($. Military 97533 × 61 days). Military 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. Military In general, a contingent payment debt instrument provides for one or more payments that are contingent as to timing or amount. Military If you hold a contingent payment bond, you must report OID as it accrues each year. Military 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. Military To figure OID accruals on contingent payment debt instruments, holders and issuers must use the noncontingent bond method. Military Noncontingent bond method. Military    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. Military In general, holders and issuers accrue OID on this projected payment schedule using the constant yield method that applies to fixed payment debt instruments. Military When a contingent payment differs from the projected fixed amount, the holders and issuers make adjustments to their OID accruals. Military If the actual contingent payment is larger than expected, both the issuer and the holder increase their OID accruals. Military If the actual contingent payment is smaller than expected, holders and issuers generally decrease their OID accruals. Military Form 1099-OID. Military   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. Military For example, the amount may not be correct if the contingent payment was different from the projected amount. Military If the amount in box 1 is not correct, you must figure the OID to report on your return under the following rules. Military For information on showing an OID adjustment on your tax return, see How To Report OID, earlier. Military Figuring OID. Military   To figure OID on a contingent payment debt instrument, you need to know the “comparable yield” and “projected payment schedule” of the debt instrument. Military The issuer must make these available to you. Military Comparable yield. Military   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. Military The comparable yield is determined as of the debt instrument's issue date. Military Projected payment schedule. Military   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. Military The projected payment schedule is created by the issuer as of the debt instrument's issue date. Military It is used to determine the issuer's and holder's interest accruals and adjustments. Military Steps for figuring OID. Military   Figure the OID on a contingent payment debt instrument in two steps. Military Figure the OID using the constant yield method (discussed earlier under Debt Instruments Issued After 1984 ) that applies to fixed payment debt instruments. Military Use the comparable yield as the yield to maturity. Military 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). Military Do not treat any amount payable as qualified stated interest. Military Adjust the OID in (1) to account for actual contingent payments. Military If the contingent payment is greater than the projected fixed amount, you have a positive adjustment. Military If the contingent payment is less than the projected fixed amount, you have a negative adjustment. Military Net positive adjustment. Military   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. Military Treat a net positive adjustment as additional OID for the tax year. Military Net negative adjustment. Military   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. Military Use a net negative adjustment to offset OID on the debt instrument for the tax year. Military 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. Military 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. Military 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. Military Basis adjustments. Military   In general, increase your basis in a contingent payment debt instrument by the OID included in income. Military Your basis, however, is not affected by any negative or positive adjustments. Military Decrease your basis by any noncontingent payment received and the projected contingent payment scheduled to be received. Military Treatment of gain or loss on sale or exchange. Military   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. Military 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. Military If the debt instrument is a capital asset, treat any loss that is more than your prior OID accruals as a capital loss. Military See Regulations section 1. Military 1275-4 for exceptions to these rules. Military Premium, acquisition premium, and market discount. Military   The rules for accruing premium, acquisition premium, and market discount do not apply to a contingent payment debt instrument. Military See Regulations section 1. Military 1275-4 to determine how to account for these items. Military Inflation-Indexed Debt Instruments This discussion shows how you figure OID on certain inflation-indexed debt instruments issued after January 5, 1997. Military An inflation-indexed debt instrument is generally a debt instrument on which the payments are adjusted for inflation and d