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2011 Taxes

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2011 Taxes

2011 taxes 3. 2011 taxes   Rent Expense Table of Contents Introduction Topics - This chapter discusses: RentConditional sales contract. 2011 taxes Leveraged leases. 2011 taxes Leveraged leases of limited-use property. 2011 taxes Taxes on Leased Property Cost of Getting a Lease Improvements by Lessee Capitalizing Rent Expenses Introduction This chapter discusses the tax treatment of rent or lease payments you make for property you use in your business but do not own. 2011 taxes It also discusses how to treat other kinds of payments you make that are related to your use of this property. 2011 taxes These include payments you make for taxes on the property. 2011 taxes Topics - This chapter discusses: The definition of rent Taxes on leased property The cost of getting a lease Improvements by the lessee Capitalizing rent expenses Rent Rent is any amount you pay for the use of property you do not own. 2011 taxes In general, you can deduct rent as an expense only if the rent is for property you use in your trade or business. 2011 taxes If you have or will receive equity in or title to the property, the rent is not deductible. 2011 taxes Unreasonable rent. 2011 taxes   You cannot take a rental deduction for unreasonable rent. 2011 taxes Ordinarily, the issue of reasonableness arises only if you and the lessor are related. 2011 taxes Rent paid to a related person is reasonable if it is the same amount you would pay to a stranger for use of the same property. 2011 taxes Rent is not unreasonable just because it is figured as a percentage of gross sales. 2011 taxes For examples of related persons, see Related persons in chapter 2, Publication 544. 2011 taxes Rent on your home. 2011 taxes   If you rent your home and use part of it as your place of business, you may be able to deduct the rent you pay for that part. 2011 taxes You must meet the requirements for business use of your home. 2011 taxes For more information, see Business use of your home in chapter 1. 2011 taxes Rent paid in advance. 2011 taxes   Generally, rent paid in your trade or business is deductible in the year paid or accrued. 2011 taxes If you pay rent in advance, you can deduct only the amount that applies to your use of the rented property during the tax year. 2011 taxes You can deduct the rest of your payment only over the period to which it applies. 2011 taxes Example 1. 2011 taxes You are a calendar year taxpayer and you leased a building for 5 years beginning July 1. 2011 taxes Your rent is $12,000 per year. 2011 taxes You paid the first year's rent ($12,000) on June 30. 2011 taxes You can deduct only $6,000 (6/12 × $12,000) for the rent that applies to the first year. 2011 taxes Example 2. 2011 taxes You are a calendar year taxpayer. 2011 taxes Last January you leased property for 3 years for $6,000 a year. 2011 taxes You paid the full $18,000 (3 × $6,000) during the first year of the lease. 2011 taxes Each year you can deduct only $6,000, the part of the lease that applies to that year. 2011 taxes Canceling a lease. 2011 taxes   You generally can deduct as rent an amount you pay to cancel a business lease. 2011 taxes Lease or purchase. 2011 taxes   There may be instances in which you must determine whether your payments are for rent or for the purchase of the property. 2011 taxes You must first determine whether your agreement is a lease or a conditional sales contract. 2011 taxes Payments made under a conditional sales contract are not deductible as rent expense. 2011 taxes Conditional sales contract. 2011 taxes   Whether an agreement is a conditional sales contract depends on the intent of the parties. 2011 taxes Determine intent based on the provisions of the agreement and the facts and circumstances that exist when you make the agreement. 2011 taxes No single test, or special combination of tests, always applies. 2011 taxes However, in general, an agreement may be considered a conditional sales contract rather than a lease if any of the following is true. 2011 taxes The agreement applies part of each payment toward an equity interest you will receive. 2011 taxes You get title to the property after you make a stated amount of required payments. 2011 taxes The amount you must pay to use the property for a short time is a large part of the amount you would pay to get title to the property. 2011 taxes You pay much more than the current fair rental value of the property. 2011 taxes You have an option to buy the property at a nominal price compared to the value of the property when you may exercise the option. 2011 taxes Determine this value when you make the agreement. 2011 taxes You have an option to buy the property at a nominal price compared to the total amount you have to pay under the agreement. 2011 taxes The agreement designates part of the payments as interest, or that part is easy to recognize as interest. 2011 taxes Leveraged leases. 2011 taxes   Leveraged lease transactions may not be considered leases. 2011 taxes Leveraged leases generally involve three parties: a lessor, a lessee, and a lender to the lessor. 2011 taxes Usually the lease term covers a large part of the useful life of the leased property, and the lessee's payments to the lessor are enough to cover the lessor's payments to the lender. 2011 taxes   If you plan to take part in what appears to be a leveraged lease, you may want to get an advance ruling. 2011 taxes Revenue Procedure 2001-28 on page 1156 of Internal Revenue Bulletin 2001-19 contains the guidelines the IRS will use to determine if a leveraged lease is a lease for federal income tax purposes. 2011 taxes Revenue Procedure 2001-29 on page 1160 of the same Internal Revenue Bulletin provides the information required to be furnished in a request for an advance ruling on a leveraged lease transaction. 2011 taxes Internal Revenue Bulletin 2001-19 is available at www. 2011 taxes irs. 2011 taxes gov/pub/irs-irbs/irb01-19. 2011 taxes pdf. 2011 taxes   In general, Revenue Procedure 2001-28 provides that, for advance ruling purposes only, the IRS will consider the lessor in a leveraged lease transaction to be the owner of the property and the transaction to be a valid lease if all the factors in the revenue procedure are met, including the following. 2011 taxes The lessor must maintain a minimum unconditional “at risk” equity investment in the property (at least 20% of the cost of the property) during the entire lease term. 2011 taxes The lessee may not have a contractual right to buy the property from the lessor at less than fair market value when the right is exercised. 2011 taxes The lessee may not invest in the property, except as provided by Revenue Procedure 2001-28. 2011 taxes The lessee may not lend any money to the lessor to buy the property or guarantee the loan used by the lessor to buy the property. 2011 taxes The lessor must show that it expects to receive a profit apart from the tax deductions, allowances, credits, and other tax attributes. 2011 taxes   The IRS may charge you a user fee for issuing a tax ruling. 2011 taxes For more information, see Revenue Procedure 2014-1 available at  www. 2011 taxes irs. 2011 taxes gov/irb/2014-1_IRB/ar05. 2011 taxes html. 2011 taxes Leveraged leases of limited-use property. 2011 taxes   The IRS will not issue advance rulings on leveraged leases of so-called limited-use property. 2011 taxes Limited-use property is property not expected to be either useful to or usable by a lessor at the end of the lease term except for continued leasing or transfer to a lessee. 2011 taxes See Revenue Procedure 2001-28 for examples of limited-use property and property that is not limited-use property. 2011 taxes Leases over $250,000. 2011 taxes   Special rules are provided for certain leases of tangible property. 2011 taxes The rules apply if the lease calls for total payments of more than $250,000 and any of the following apply. 2011 taxes Rents increase during the lease. 2011 taxes Rents decrease during the lease. 2011 taxes Rents are deferred (rent is payable after the end of the calendar year following the calendar year in which the use occurs and the rent is allocated). 2011 taxes Rents are prepaid (rent is payable before the end of the calendar year preceding the calendar year in which the use occurs and the rent is allocated). 2011 taxes These rules do not apply if your lease specifies equal amounts of rent for each month in the lease term and all rent payments are due in the calendar year to which the rent relates (or in the preceding or following calendar year). 2011 taxes   Generally, if the special rules apply, you must use an accrual method of accounting (and time value of money principles) for your rental expenses, regardless of your overall method of accounting. 2011 taxes In addition, in certain cases in which the IRS has determined that a lease was designed to achieve tax avoidance, you must take rent and stated or imputed interest into account under a constant rental accrual method in which the rent is treated as accruing ratably over the entire lease term. 2011 taxes For details, see section 467 of the Internal Revenue Code. 2011 taxes Taxes on Leased Property If you lease business property, you can deduct as additional rent any taxes you have to pay to or for the lessor. 2011 taxes When you can deduct these taxes as additional rent depends on your accounting method. 2011 taxes Cash method. 2011 taxes   If you use the cash method of accounting, you can deduct the taxes as additional rent only for the tax year in which you pay them. 2011 taxes Accrual method. 2011 taxes   If you use an accrual method of accounting, you can deduct taxes as additional rent for the tax year in which you can determine all the following. 2011 taxes That you have a liability for taxes on the leased property. 2011 taxes How much the liability is. 2011 taxes That economic performance occurred. 2011 taxes   The liability and amount of taxes are determined by state or local law and the lease agreement. 2011 taxes Economic performance occurs as you use the property. 2011 taxes Example 1. 2011 taxes Oak Corporation is a calendar year taxpayer that uses an accrual method of accounting. 2011 taxes Oak leases land for use in its business. 2011 taxes Under state law, owners of real property become liable (incur a lien on the property) for real estate taxes for the year on January 1 of that year. 2011 taxes However, they do not have to pay these taxes until July 1 of the next year (18 months later) when tax bills are issued. 2011 taxes Under the terms of the lease, Oak becomes liable for the real estate taxes in the later year when the tax bills are issued. 2011 taxes If the lease ends before the tax bill for a year is issued, Oak is not liable for the taxes for that year. 2011 taxes Oak cannot deduct the real estate taxes as rent until the tax bill is issued. 2011 taxes This is when Oak's liability under the lease becomes fixed. 2011 taxes Example 2. 2011 taxes The facts are the same as in Example 1 except that, according to the terms of the lease, Oak becomes liable for the real estate taxes when the owner of the property becomes liable for them. 2011 taxes As a result, Oak will deduct the real estate taxes as rent on its tax return for the earlier year. 2011 taxes This is the year in which Oak's liability under the lease becomes fixed. 2011 taxes Cost of Getting a Lease You may either enter into a new lease with the lessor of the property or get an existing lease from another lessee. 2011 taxes Very often when you get an existing lease from another lessee, you must pay the previous lessee money to get the lease, besides having to pay the rent on the lease. 2011 taxes If you get an existing lease on property or equipment for your business, you generally must amortize any amount you pay to get that lease over the remaining term of the lease. 2011 taxes For example, if you pay $10,000 to get a lease and there are 10 years remaining on the lease with no option to renew, you can deduct $1,000 each year. 2011 taxes The cost of getting an existing lease of tangible property is not subject to the amortization rules for section 197 intangibles discussed in chapter 8. 2011 taxes Option to renew. 2011 taxes   The term of the lease for amortization includes all renewal options plus any other period for which you and the lessor reasonably expect the lease to be renewed. 2011 taxes However, this applies only if less than 75% of the cost of getting the lease is for the term remaining on the purchase date (not including any period for which you may choose to renew, extend, or continue the lease). 2011 taxes Allocate the lease cost to the original term and any option term based on the facts and circumstances. 2011 taxes In some cases, it may be appropriate to make the allocation using a present value computation. 2011 taxes For more information, see Regulations section 1. 2011 taxes 178-1(b)(5). 2011 taxes Example 1. 2011 taxes You paid $10,000 to get a lease with 20 years remaining on it and two options to renew for 5 years each. 2011 taxes Of this cost, you paid $7,000 for the original lease and $3,000 for the renewal options. 2011 taxes Because $7,000 is less than 75% of the total $10,000 cost of the lease (or $7,500), you must amortize the $10,000 over 30 years. 2011 taxes That is the remaining life of your present lease plus the periods for renewal. 2011 taxes Example 2. 2011 taxes The facts are the same as in Example 1, except that you paid $8,000 for the original lease and $2,000 for the renewal options. 2011 taxes You can amortize the entire $10,000 over the 20-year remaining life of the original lease. 2011 taxes The $8,000 cost of getting the original lease was not less than 75% of the total cost of the lease (or $7,500). 2011 taxes Cost of a modification agreement. 2011 taxes   You may have to pay an additional “rent” amount over part of the lease period to change certain provisions in your lease. 2011 taxes You must capitalize these payments and amortize them over the remaining period of the lease. 2011 taxes You cannot deduct the payments as additional rent, even if they are described as rent in the agreement. 2011 taxes Example. 2011 taxes You are a calendar year taxpayer and sign a 20-year lease to rent part of a building starting on January 1. 2011 taxes However, before you occupy it, you decide that you really need less space. 2011 taxes The lessor agrees to reduce your rent from $7,000 to $6,000 per year and to release the excess space from the original lease. 2011 taxes In exchange, you agree to pay an additional rent amount of $3,000, payable in 60 monthly installments of $50 each. 2011 taxes   You must capitalize the $3,000 and amortize it over the 20-year term of the lease. 2011 taxes Your amortization deduction each year will be $150 ($3,000 ÷ 20). 2011 taxes You cannot deduct the $600 (12 × $50) that you will pay during each of the first 5 years as rent. 2011 taxes Commissions, bonuses, and fees. 2011 taxes   Commissions, bonuses, fees, and other amounts you pay to get a lease on property you use in your business are capital costs. 2011 taxes You must amortize these costs over the term of the lease. 2011 taxes Loss on merchandise and fixtures. 2011 taxes   If you sell at a loss merchandise and fixtures that you bought solely to get a lease, the loss is a cost of getting the lease. 2011 taxes You must capitalize the loss and amortize it over the remaining term of the lease. 2011 taxes Improvements by Lessee If you add buildings or make other permanent improvements to leased property, depreciate the cost of the improvements using the modified accelerated cost recovery system (MACRS). 2011 taxes Depreciate the property over its appropriate recovery period. 2011 taxes You cannot amortize the cost over the remaining term of the lease. 2011 taxes If you do not keep the improvements when you end the lease, figure your gain or loss based on your adjusted basis in the improvements at that time. 2011 taxes For more information, see the discussion of MACRS in Publication 946, How To Depreciate Property. 2011 taxes Assignment of a lease. 2011 taxes   If a long-term lessee who makes permanent improvements to land later assigns all lease rights to you for money and you pay the rent required by the lease, the amount you pay for the assignment is a capital investment. 2011 taxes If the rental value of the leased land increased since the lease began, part of your capital investment is for that increase in the rental value. 2011 taxes The rest is for your investment in the permanent improvements. 2011 taxes   The part that is for the increased rental value of the land is a cost of getting a lease, and you amortize it over the remaining term of the lease. 2011 taxes You can depreciate the part that is for your investment in the improvements over the recovery period of the property as discussed earlier, without regard to the lease term. 2011 taxes Capitalizing Rent Expenses Under the uniform capitalization rules, you must capitalize the direct costs and part of the indirect costs for certain production or resale activities. 2011 taxes Include these costs in the basis of property you produce or acquire for resale, rather than claiming them as a current deduction. 2011 taxes You recover the costs through depreciation, amortization, or cost of goods sold when you use, sell, or otherwise dispose of the property. 2011 taxes Indirect costs include amounts incurred for renting or leasing equipment, facilities, or land. 2011 taxes Uniform capitalization rules. 2011 taxes   You may be subject to the uniform capitalization rules if you do any of the following, unless the property is produced for your use other than in a business or an activity carried on for profit. 2011 taxes Produce real property or tangible personal property. 2011 taxes For this purpose, tangible personal property includes a film, sound recording, video tape, book, or similar property. 2011 taxes Acquire property for resale. 2011 taxes However, these rules do not apply to the following property. 2011 taxes Personal property you acquire for resale if your average annual gross receipts are $10 million or less for the 3 prior tax years. 2011 taxes Property you produce if you meet either of the following conditions. 2011 taxes Your indirect costs of producing the property are $200,000 or less. 2011 taxes You use the cash method of accounting and do not account for inventories. 2011 taxes Example 1. 2011 taxes You rent construction equipment to build a storage facility. 2011 taxes If you are subject to the uniform capitalization rules, you must capitalize as part of the cost of the building the rent you paid for the equipment. 2011 taxes You recover your cost by claiming a deduction for depreciation on the building. 2011 taxes Example 2. 2011 taxes You rent space in a facility to conduct your business of manufacturing tools. 2011 taxes If you are subject to the uniform capitalization rules, you must include the rent you paid to occupy the facility in the cost of the tools you produce. 2011 taxes More information. 2011 taxes   For more information on these rules, see Uniform Capitalization Rules in Publication 538 and the regulations under Internal Revenue Code section 263A. 2011 taxes Prev  Up  Next   Home   More Online Publications
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Consumer Protection Offices

City, county, regional, and state consumer offices offer a variety of important services. They might mediate complaints, conduct investigations, prosecute offenders of consumer laws, license and regulate professional service providers, provide educational materials and advocate for consumer rights. To save time, call before sending a written complaint. Ask if the office handles the type of complaint you have and if complaint forms are provided.

State Consumer Protection Offices

Colorado Office of the Attorney General

Website: Colorado Office of the Attorney General

Address: Colorado Office of the Attorney General
Consumer Protection Section
1300 Broadway, 10th Floor
Denver, CO 80203

Phone Number: 720-508-6006

Toll-free: 1-800-222-4444 (CO)

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County Consumer Protection Offices

Pueblo County District Attorney's Office

Website: Pueblo County District Attorney's Office

Address: Pueblo County District Attorney's Office
Economic Crimes Unit
701 Court St.
Pueblo, CO 81003

Phone Number: 719-583-6030

Weld County District Attorney's Office

Website: Weld County District Attorney's Office

Address: Weld County District Attorney's Office
915 10th St.
PO Box 1167
Greeley, CO 80632-1167

Phone Number: 970-356-4010

Fourth Judicial District Attorney's Office

Website: Fourth Judicial District Attorney's Office

Address: Fourth Judicial District Attorney's Office
Economic Crimes Division
El Paso and Teller Counties
105 E. Vermijo Ave.
Colorado Springs, CO 80903

Phone Number: 719-520-6000 719-520-6002 (Fraud Hotline)

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City Consumer Protection Offices

Denver District Attorney's Office

Website: Denver District Attorney's Office

Address: Denver District Attorney's Office
Economic Crimes Unit
201 W. Colfax Ave.
Denver, CO 80202

Phone Number: 720-913-9179

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Banking Authorities

The officials listed in this section regulate and supervise state-chartered banks. Many of them handle or refer problems and complaints about other types of financial institutions as well. Some also answer general questions about banking and consumer credit. If you are dealing with a federally chartered bank, check Federal Agencies.

Department of Regulatory Agencies

Website: Department of Regulatory Agencies

Address: Department of Regulatory Agencies
Division of Banking
1560 Broadway, Suite 975
Denver, CO 80202

Phone Number: 303-894-7575

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Insurance Regulators

Each state has its own laws and regulations for each type of insurance. The officials listed in this section enforce these laws. Many of these offices can also provide you with information to help you make informed insurance buying decisions.

Department of Regulatory Agencies

Website: Department of Regulatory Agencies

Address: Department of Regulatory Agencies
Division of Insurance
1560 Broadway, Suite 850
Denver, CO 80202

Phone Number: 303-894-7490

Toll-free: 1-800-930-3745 (CO)

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Securities Administrators

Each state has its own laws and regulations for securities brokers and securities - including stocks, mutual funds, commodities, real estate, etc. The officials and agencies listed in this section enforce these laws and regulations. Many of these offices can also provide information to help you make informed investment decisions.

Department of Regulatory Agencies

Website: Department of Regulatory Agencies

Address: Department of Regulatory Agencies
Division of Securities
1560 Broadway, Suite 900
Denver, CO 80202

Phone Number: 303-894-2320

TTY: 1-800-659-2656

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Utility Commissions

State Utility Commissions regulate services and rates for gas, electricity and telephones within your state. In some states, the utility commissions regulate other services such as water, transportation, and the moving of household goods. Many utility commissions handle consumer complaints. Sometimes, if a number of complaints are received about the same utility matter, they will conduct investigations.

Public Utilities Commission

Website: Public Utilities Commission

Address: Public Utilities Commission
Consumer Protection Division
1560 Broadway, Suite 250
Denver, CO 80202

Phone Number: 303-894-2070

Toll-free: 1-800-456-0858 (CO)

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The 2011 Taxes

2011 taxes 3. 2011 taxes   Investment Expenses Table of Contents Topics - This chapter discusses: Useful Items - You may want to see: Limits on DeductionsPassive activity. 2011 taxes Other income (nonpassive income). 2011 taxes Expenses. 2011 taxes Additional information. 2011 taxes Interest ExpensesInvestment Interest Limit on Deduction Bond Premium AmortizationSpecial rules to determine amounts payable on a bond. 2011 taxes Basis. 2011 taxes How To Figure Amortization Choosing To Amortize How To Report Amortization Expenses of Producing IncomeFees to buy or sell. 2011 taxes Including mutual fund or REMIC expenses in income. 2011 taxes Nondeductible ExpensesUsed as collateral. 2011 taxes Short-sale expenses. 2011 taxes Expenses for both tax-exempt and taxable income. 2011 taxes State income taxes. 2011 taxes Nondeductible amount. 2011 taxes Basis adjustment. 2011 taxes How To Report Investment Expenses When To Report Investment Expenses Topics - This chapter discusses: Limits on Deductions , Interest Expenses , Bond Premium Amortization , Expenses of Producing Income , Nondeductible Expenses , How To Report Investment Expenses , and When To Report Investment Expenses . 2011 taxes Useful Items - You may want to see: Publication 535 Business Expenses 925 Passive Activity and At-Risk Rules 929 Tax Rules for Children and Dependents Form (and Instructions) Schedule A (Form 1040) Itemized Deductions 4952 Investment Interest Expense Deduction See chapter 5, How To Get Tax Help , for information about getting these publications and forms. 2011 taxes Limits on Deductions Your deductions for investment expenses may be limited by: The at-risk rules, The passive activity loss limits, The limit on investment interest, or The 2% limit on certain miscellaneous itemized deductions. 2011 taxes The at-risk rules and passive activity rules are explained briefly in this section. 2011 taxes The limit on investment interest is explained later in this chapter under Interest Expenses . 2011 taxes The 2% limit is explained later in this chapter under Expenses of Producing Income . 2011 taxes At-risk rules. 2011 taxes   Special at-risk rules apply to most income-producing activities. 2011 taxes These rules limit the amount of loss you can deduct to the amount you risk losing in the activity. 2011 taxes Generally, this is the cash and the adjusted basis of property you contribute to the activity. 2011 taxes It also includes money you borrow for use in the activity if you are personally liable for repayment or if you use property not used in the activity as security for the loan. 2011 taxes For more information, see Publication 925. 2011 taxes Passive activity losses and credits. 2011 taxes   The amount of losses and tax credits you can claim from passive activities is limited. 2011 taxes Generally, you are allowed to deduct passive activity losses only up to the amount of your passive activity income. 2011 taxes Also, you can use credits from passive activities only against tax on the income from passive activities. 2011 taxes There are exceptions for certain activities, such as rental real estate activities. 2011 taxes Passive activity. 2011 taxes   A passive activity generally is any activity involving the conduct of any trade or business in which you do not materially participate and any rental activity. 2011 taxes However, if you are involved in renting real estate, the activity is not a passive activity if both of the following are true. 2011 taxes More than one-half of the personal services you perform during the year in all trades or businesses are performed in real property trades or businesses in which you materially participate. 2011 taxes You perform more than 750 hours of services during the year in real property trades or businesses in which you materially participate. 2011 taxes  The term “trade or business” generally means any activity that involves the conduct of a trade or business, is conducted in anticipation of starting a trade or business, or involves certain research or experimental expenditures. 2011 taxes However, it does not include rental activities or certain activities treated as incidental to holding property for investment. 2011 taxes   You are considered to materially participate in an activity if you are involved on a regular, continuous, and substantial basis in the operations of the activity. 2011 taxes Other income (nonpassive income). 2011 taxes    Generally, you can use losses from passive activities only to offset income from passive activities. 2011 taxes You cannot use passive activity losses to offset your other income, such as your wages or your portfolio income. 2011 taxes Portfolio income includes gross income from interest, dividends, annuities, or royalties that is not derived in the ordinary course of a trade or business. 2011 taxes It also includes gains or losses (not derived in the ordinary course of a trade or business) from the sale or trade of property (other than an interest in a passive activity) producing portfolio income or held for investment. 2011 taxes This includes capital gain distributions from mutual funds (and other regulated investment companies) and real estate investment trusts. 2011 taxes   You cannot use passive activity losses to offset Alaska Permanent Fund dividends. 2011 taxes Expenses. 2011 taxes   Do not include in the computation of your passive activity income or loss: Expenses (other than interest) that are clearly and directly allocable to your portfolio income, or Interest expense properly allocable to portfolio income. 2011 taxes However, this interest and other expenses may be subject to other limits. 2011 taxes These limits are explained in the rest of this chapter. 2011 taxes Additional information. 2011 taxes   For more information about determining and reporting income and losses from passive activities, see Publication 925. 2011 taxes Interest Expenses This section discusses interest expenses you may be able to deduct as an investor. 2011 taxes For information on business interest, see chapter 4 of Publication 535. 2011 taxes You cannot deduct personal interest expenses other than qualified home mortgage interest, as explained in Publication 936, Home Mortgage Interest Deduction, and interest on certain student loans, as explained in Publication 970. 2011 taxes Investment Interest If you borrow money to buy property you hold for investment, the interest you pay is investment interest. 2011 taxes You can deduct investment interest subject to the limit discussed later. 2011 taxes However, you cannot deduct interest you incurred to produce tax-exempt income. 2011 taxes See Tax-exempt income under Nondeductible Expenses, later. 2011 taxes You also cannot deduct interest expenses on straddles discussed under Interest expense and carrying charges on straddles , later. 2011 taxes Investment interest does not include any qualified home mortgage interest or any interest taken into account in computing income or loss from a passive activity. 2011 taxes Investment property. 2011 taxes   Property held for investment includes property that produces interest, dividends, annuities, or royalties not derived in the ordinary course of a trade or business. 2011 taxes It also includes property that produces gain or loss (not derived in the ordinary course of a trade or business) from the sale or trade of property producing these types of income or held for investment (other than an interest in a passive activity). 2011 taxes Investment property also includes an interest in a trade or business activity in which you did not materially participate (other than a passive activity). 2011 taxes Partners, shareholders, and beneficiaries. 2011 taxes   To determine your investment interest, combine your share of investment interest from a partnership, S corporation, estate, or trust with your other investment interest. 2011 taxes Allocation of Interest Expense If you borrow money for business or personal purposes as well as for investment, you must allocate the debt among those purposes. 2011 taxes Only the interest expense on the part of the debt used for investment purposes is treated as investment interest. 2011 taxes The allocation is not affected by the use of property that secures the debt. 2011 taxes Example 1. 2011 taxes You borrow $10,000 and use $8,000 to buy stock. 2011 taxes You use the other $2,000 to buy items for your home. 2011 taxes Since 80% of the debt is used for, and allocated to, investment purposes, 80% of the interest on that debt is investment interest. 2011 taxes The other 20% is nondeductible personal interest. 2011 taxes Debt proceeds received in cash. 2011 taxes   If you receive debt proceeds in cash, the proceeds are generally not treated as investment property. 2011 taxes Debt proceeds deposited in account. 2011 taxes   If you deposit debt proceeds in an account, that deposit is treated as investment property, regardless of whether the account bears interest. 2011 taxes But, if you withdraw the funds and use them for another purpose, you must reallocate the debt to determine the amount considered to be for investment purposes. 2011 taxes Example 2. 2011 taxes Assume in Example 1 that you borrowed the money on March 1 and immediately bought the stock for $8,000. 2011 taxes You did not buy the household items until June 1. 2011 taxes You had deposited the $2,000 in the bank. 2011 taxes You had no other transactions on the bank account until June. 2011 taxes You did not sell the stock, and you made no principal payments on the debt. 2011 taxes You paid interest from another account. 2011 taxes The $8,000 is treated as being used for an investment purpose. 2011 taxes The $2,000 is treated as being used for an investment purpose for the 3-month period. 2011 taxes Your total interest expense for 3 months on this debt is investment interest. 2011 taxes In June, when you spend the $2,000 for household items, you must begin to allocate 80% of the debt and the interest expense to investment purposes and 20% to personal purposes. 2011 taxes Amounts paid within 30 days. 2011 taxes   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. 2011 taxes This applies to any payment made within 30 days before or after the proceeds are received in cash or deposited in your account. 2011 taxes   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. 2011 taxes Payments on debt may require new allocation. 2011 taxes   As you repay a debt used for more than one purpose, you must reallocate the balance. 2011 taxes You must first reduce the amount allocated to personal purposes by the repayment. 2011 taxes You then reallocate the rest of the debt to find what part is for investment purposes. 2011 taxes Example 3. 2011 taxes If, in Example 2 , you repay $500 on November 1, the entire repayment is applied against the amount allocated to personal purposes. 2011 taxes The debt balance is now allocated as $8,000 for investment purposes and $1,500 for personal purposes. 2011 taxes Until the next reallocation is necessary, 84% ($8,000 ÷ $9,500) of the debt and the interest expense is allocated to investment. 2011 taxes Pass-through entities. 2011 taxes   If you use borrowed funds to buy an interest in a partnership or S corporation, then the interest on those funds must be allocated based on the assets of the entity. 2011 taxes If you contribute to the capital of the entity, you can make the allocation using any reasonable method. 2011 taxes Additional allocation rules. 2011 taxes   For more information about allocating interest expense, see chapter 4 of Publication 535. 2011 taxes When To Deduct Investment Interest If you use the cash method of accounting, you must pay the interest before you can deduct it. 2011 taxes If you use an accrual method of accounting, you can deduct interest over the period it accrues, regardless of when you pay it. 2011 taxes For an exception, see Unpaid expenses owed to related party under When To Report Investment Expenses, later in this chapter. 2011 taxes Example. 2011 taxes You borrowed $1,000 on August 26, 2013, payable in 90 days at 12% interest. 2011 taxes On November 26, 2013, you paid this with a new note for $1,030, due on February 26, 2014. 2011 taxes If you use the cash method of accounting, you cannot deduct any part of the $30 interest on your return for 2013 because you did not actually pay it. 2011 taxes If you use an accrual method, you may be able to deduct a portion of the interest on the loans through December 31, 2013, on your return for 2013. 2011 taxes Interest paid in advance. 2011 taxes   Generally, if you pay interest in advance for a period that goes beyond the end of the tax year, you must spread the interest over the tax years to which it belongs under the OID rules discussed in chapter 1. 2011 taxes You can deduct in each year only the interest for that year. 2011 taxes Interest on margin accounts. 2011 taxes   If you are a cash method taxpayer, you can deduct interest on margin accounts to buy taxable securities as investment interest in the year you paid it. 2011 taxes You are considered to have paid interest on these accounts only when you actually pay the broker or when payment becomes available to the broker through your account. 2011 taxes Payment may become available to the broker through your account when the broker collects dividends or interest for your account, or sells securities held for you or received from you. 2011 taxes   You cannot deduct any interest on money borrowed for personal reasons. 2011 taxes Limit on interest deduction for market discount bonds. 2011 taxes   The amount you can deduct for interest expense you paid or accrued during the year to buy or carry a market discount bond may be limited. 2011 taxes This limit does not apply if you accrue the market discount and include it in your income currently. 2011 taxes   Under this limit, the interest is deductible only to the extent it is more than: The total interest and OID includible in gross income for the bond for the year, plus The market discount for the number of days you held the bond during the year. 2011 taxes Figure the amount in (2) above using the rules for figuring accrued market discount in chapter 1 under Market Discount Bonds . 2011 taxes Interest not deducted due to limit. 2011 taxes   In the year you dispose of the bond, you can deduct any interest expense you were not allowed to deduct in earlier years because of the limit. 2011 taxes Choosing to deduct disallowed interest expense before the year of disposition. 2011 taxes   You can choose to deduct disallowed interest expense in any year before the year you dispose of the bond, up to your net interest income from the bond during the year. 2011 taxes The rest of the disallowed interest expense remains deductible in the year you dispose of the bond. 2011 taxes Net interest income. 2011 taxes   This is the interest income (including OID) from the bond that you include in income for the year, minus the interest expense paid or accrued during the year to purchase or carry the bond. 2011 taxes Limit on interest deduction for short-term obligations. 2011 taxes   If the current income inclusion rules discussed in chapter 1 under Discount on Short-Term Obligations do not apply to you, the amount you can deduct for interest expense you paid or accrued during the year to buy or carry a short-term obligation is limited. 2011 taxes   The interest is deductible only to the extent it is more than: The amount of acquisition discount or OID on the obligation for the tax year, plus The amount of any interest payable on the obligation for the year that is not included in income because of your accounting method (other than interest taken into account in determining the amount of acquisition discount or OID). 2011 taxes The method of determining acquisition discount and OID for short-term obligations is discussed in chapter 1 under Discount on Short-Term Obligations . 2011 taxes Interest not deducted due to limit. 2011 taxes   In the year you dispose of the obligation, or, if you choose, in another year in which you have net interest income from the obligation, you can deduct any interest expense you were not allowed to deduct for an earlier year because of the limit. 2011 taxes Follow the same rules provided in the earlier discussion under Limit on interest deduction for market discount bonds , earlier. 2011 taxes Limit on Deduction Generally, your deduction for investment interest expense is limited to your net investment income. 2011 taxes You can carry over the amount of investment interest you could not deduct because of this limit to the next tax year. 2011 taxes The interest carried over is treated as investment interest paid or accrued in that next year. 2011 taxes You can carry over disallowed investment interest to the next tax year even if it is more than your taxable income in the year the interest was paid or accrued. 2011 taxes Net Investment Income Determine the amount of your net investment income by subtracting your investment expenses (other than interest expense) from your investment income. 2011 taxes Investment income. 2011 taxes   This generally includes your gross income from property held for investment (such as interest, dividends, annuities, and royalties). 2011 taxes Investment income does not include Alaska Permanent Fund dividends. 2011 taxes It also does not include qualified dividends or net capital gain unless you choose to include them. 2011 taxes Choosing to include qualified dividends. 2011 taxes   Investment income generally does not include qualified dividends, discussed in chapter 1. 2011 taxes However, you can choose to include all or part of your qualified dividends in investment income. 2011 taxes   You make this choice by completing Form 4952, line 4g, according to its instructions. 2011 taxes   If you choose to include any of your qualified dividends in investment income, you must reduce your qualified dividends that are eligible for the lower capital gains tax rates by the same amount. 2011 taxes Choosing to include net capital gain. 2011 taxes    Investment income generally does not include net capital gain from disposing of investment property (including capital gain distributions from mutual funds). 2011 taxes However, you can choose to include all or part of your net capital gain in investment income. 2011 taxes   You make this choice by completing Form 4952, line 4g, according to its instructions. 2011 taxes   If you choose to include any of your net capital gain in investment income, you must reduce your net capital gain that is eligible for the lower capital gains tax rates by the same amount. 2011 taxes   For more information about the capital gains rates, see Capital Gain Tax Rates in chapter 4. 2011 taxes    Before making either choice, consider the overall effect on your tax liability. 2011 taxes Compare your tax if you make one or both of these choices with your tax if you do not. 2011 taxes Investment income of child reported on parent's return. 2011 taxes   Investment income includes the part of your child's interest and dividend income you choose to report on your return. 2011 taxes If the child does not have qualified dividends, Alaska Permanent Fund dividends, or capital gain distributions, this is the amount on line 6 of Form 8814. 2011 taxes Include it on line 4a of Form 4952. 2011 taxes Example. 2011 taxes Your 8-year-old son has interest income of $2,200, which you choose to report on your own return. 2011 taxes You enter $2,200 on Form 8814, lines 1a and 4, and $200 on lines 6 and 12 and complete Part II. 2011 taxes Also enter $200 on Form 1040, line 21. 2011 taxes Your investment income includes this $200. 2011 taxes Child's qualified dividends. 2011 taxes   If part of the amount you report is your child's qualified dividends, that part (which is reported on Form 1040, line 9b) generally does not count as investment income. 2011 taxes However, you can choose to include all or part of it in investment income, as explained under Choosing to include qualified dividends , earlier. 2011 taxes   Your investment income also includes the amount on Form 8814, line 12 (or, if applicable, the reduced amount figured next under Child's Alaska Permanent Fund dividends). 2011 taxes Child's Alaska Permanent Fund dividends. 2011 taxes   If part of the amount you report is your child's Alaska Permanent Fund dividends, that part does not count as investment income. 2011 taxes To figure the amount of your child's income that you can consider your investment income, start with the amount on Form 8814, line 6. 2011 taxes Multiply that amount by a percentage that is equal to the Alaska Permanent Fund dividends divided by the total amount on Form 8814, line 4. 2011 taxes Subtract the result from the amount on Form 8814, line 12. 2011 taxes Example. 2011 taxes Your 10-year-old child has taxable interest income of $4,000 and Alaska Permanent Fund dividends of $2,000. 2011 taxes You choose to report this on your return. 2011 taxes You enter $4,000 on Form 8814, line 1a, $2,000 on line 2a, and $6,000 on line 4. 2011 taxes You then enter $4,000 on Form 8814, lines 6 and 12, and Form 1040, line 21. 2011 taxes You figure the amount of your child's income that you can consider your investment income as follows: $4,000 − ($4,000 × ($2,000 ÷ $6,000)) = $2,667 You include the result, $2,667, on Form 4952, line 4a. 2011 taxes Child's capital gain distributions. 2011 taxes   If part of the amount you report is your child's capital gain distributions, that part (which is reported on Schedule D (Form 1040), line 13, or Form 1040, line 13) generally does not count as investment income. 2011 taxes However, you can choose to include all or part of it in investment income, as explained in Choosing to include net capital gain , earlier. 2011 taxes   Your investment income also includes the amount on Form 8814, line 12 (or, if applicable, the reduced amount figured under Child's Alaska Permanent Fund dividends , earlier). 2011 taxes Investment expenses. 2011 taxes   Investment expenses are your allowed deductions (other than interest expense) directly connected with the production of investment income. 2011 taxes Investment expenses that are included as a miscellaneous itemized deduction on Schedule A (Form 1040) are allowable deductions after applying the 2% limit that applies to miscellaneous itemized deductions. 2011 taxes Use the smaller of: The investment expenses included on Schedule A (Form 1040), line 23, or The amount on Schedule A (Form 1040), line 27. 2011 taxes See Expenses of Producing Income , later, for a discussion of the 2% limit. 2011 taxes Losses from passive activities. 2011 taxes   Income or expenses that you used in computing income or loss from a passive activity are not included in determining your investment income or investment expenses (including investment interest expense). 2011 taxes See Publication 925 for information about passive activities. 2011 taxes Example. 2011 taxes Ted is a partner in a partnership that operates a business. 2011 taxes However, he does not materially participate in the partnership's business. 2011 taxes Ted's interest in the partnership is considered a passive activity. 2011 taxes Ted's investment income from interest and dividends (other than qualified dividends) is $10,000. 2011 taxes His investment expenses (other than interest) are $3,200 after taking into account the 2% limit on miscellaneous itemized deductions. 2011 taxes His investment interest expense is $8,000. 2011 taxes Ted also has income from the partnership of $2,000. 2011 taxes Ted figures his net investment income and the limit on his investment interest expense deduction in the following way: Total investment income $10,000 Minus: Investment expenses (other than interest) 3,200 Net investment income $6,800 Deductible investment interest expense for the year $6,800 The $2,000 of income from the passive activity is not used in determining Ted's net investment income. 2011 taxes His investment interest deduction for the year is limited to $6,800, the amount of his net investment income. 2011 taxes Form 4952 Use Form 4952 to figure your deduction for investment interest. 2011 taxes See Form 4952 for more information. 2011 taxes Exception to use of Form 4952. 2011 taxes   You do not have to complete Form 4952 or attach it to your return if you meet all of the following tests. 2011 taxes Your investment interest expense is not more than your investment income from interest and ordinary dividends minus any qualified dividends. 2011 taxes You do not have any other deductible investment expenses. 2011 taxes You have no carryover of investment interest expense from 2012. 2011 taxes   If you meet all of these tests, you can deduct all of your investment interest. 2011 taxes    Bond Premium Amortization If you pay a premium to buy a bond, the premium is part of your basis in the bond. 2011 taxes If the bond yields taxable interest, you can choose to amortize the premium. 2011 taxes This generally means that each year, over the life of the bond, you use a part of the premium to reduce the amount of interest includible in your income. 2011 taxes If you make this choice, you must reduce your basis in the bond by the amortization for the year. 2011 taxes If the bond yields tax-exempt interest, you must amortize the premium. 2011 taxes This amortized amount is not deductible in determining taxable income. 2011 taxes However, each year you must reduce your basis in the bond (and tax-exempt interest otherwise reportable on Form 1040, line 8b) by the amortization for the year. 2011 taxes Bond premium. 2011 taxes   Bond premium is the amount by which your basis in the bond right after you get it is more than the total of all amounts payable on the bond after you get it (other than payments of qualified stated interest). 2011 taxes For example, a bond with a maturity value of $1,000 generally would have a $50 premium if you buy it for $1,050. 2011 taxes Special rules to determine amounts payable on a bond. 2011 taxes   For special rules that apply to determine the amounts payable on a variable rate bond, an inflation-indexed debt instrument, a bond that provides for certain alternative payment schedules (for example, a bond callable prior to the stated maturity date of the bond), or a bond that provides for remote or incidental contingencies, see Regulations section 1. 2011 taxes 171-3. 2011 taxes Basis. 2011 taxes   In general, your basis for figuring bond premium amortization is the same as your basis for figuring any loss on the sale of the bond. 2011 taxes However, you may need to use a different basis for: Convertible bonds, Bonds you got in a trade, and Bonds whose basis has to be determined using the basis of the person who transferred the bond to you. 2011 taxes See Regulations section 1. 2011 taxes 171-1(e). 2011 taxes Dealers. 2011 taxes   A dealer in taxable bonds (or anyone who holds them mainly for sale to customers in the ordinary course of a trade or business or who would properly include bonds in inventory at the close of the tax year) cannot claim a deduction for amortizable bond premium. 2011 taxes   See section 75 of the Internal Revenue Code for the treatment of bond premium by a dealer in tax-exempt bonds. 2011 taxes How To Figure Amortization For bonds issued after September 27, 1985, you must amortize bond premium using a constant yield method on the basis of the bond's yield to maturity, determined by using the bond's basis and compounding at the close of each accrual period. 2011 taxes Constant yield method. 2011 taxes   Figure the bond premium amortization for each accrual period as follows. 2011 taxes Step 1: Determine your yield. 2011 taxes   Your yield is the discount rate that, when used in figuring the present value of all remaining payments to be made on the bond (including payments of qualified stated interest), produces an amount equal to your basis in the bond. 2011 taxes Figure the yield as of the date you got the bond. 2011 taxes It must be constant over the term of the bond and must be figured to at least two decimal places when expressed as a percentage. 2011 taxes   If you do not know the yield, consult your broker or tax advisor. 2011 taxes Databases available to them are likely to show the yield at the date of purchase. 2011 taxes Step 2: Determine the accrual periods. 2011 taxes   You can choose the accrual periods to use. 2011 taxes They may be of any length and may vary in length over the term of the bond, but each accrual period can be no longer than 1 year and each scheduled payment of principal or interest must occur either on the first or the final day of an accrual period. 2011 taxes The computation is simplest if accrual periods are the same as the intervals between interest payment dates. 2011 taxes Step 3: Determine the bond premium for the accrual period. 2011 taxes   To do this, multiply your adjusted acquisition price at the beginning of the accrual period by your yield. 2011 taxes Then subtract the result from the qualified stated interest for the period. 2011 taxes   Your adjusted acquisition price at the beginning of the first accrual period is the same as your basis. 2011 taxes After that, it is your basis decreased by the amount of bond premium amortized for earlier periods and the amount of any payment previously made on the bond other than a payment of qualified stated interest. 2011 taxes Example. 2011 taxes On February 1, 2012, you bought a taxable bond for $110,000. 2011 taxes The bond has a stated principal amount of $100,000, payable at maturity on February 1, 2019, making your premium $10,000 ($110,000 − $100,000). 2011 taxes The bond pays qualified stated interest of $10,000 on February 1 of each year. 2011 taxes Your yield is 8. 2011 taxes 07439% compounded annually. 2011 taxes You choose to use annual accrual periods ending on February 1 of each year. 2011 taxes To find your bond premium amortization for the accrual period ending on February 1, 2013, you multiply the adjusted acquisition price at the beginning of the period ($110,000) by your yield. 2011 taxes When you subtract the result ($8,881. 2011 taxes 83) from the qualified stated interest for the period ($10,000), you find that your bond premium amortization for the period is $1,118. 2011 taxes 17. 2011 taxes Special rules to figure amortization. 2011 taxes   For special rules to figure the bond premium amortization on a variable rate bond, an inflation-indexed debt instrument, a bond that provides for certain alternative payment schedules (for example, a bond callable prior to the stated maturity date of the bond), or a bond that provides for remote or incidental contingencies, see Regulations section 1. 2011 taxes 171-3. 2011 taxes Bonds Issued Before September 28, 1985 For these bonds, you can amortize bond premium using any reasonable method. 2011 taxes Reasonable methods include: The straight-line method, and The Revenue Ruling 82-10 method. 2011 taxes Straight-line method. 2011 taxes   Under this method, the amount of your bond premium amortization is the same each month. 2011 taxes Divide the number of months you held the bond during the year by the number of months from the beginning of the tax year (or, if later, the date of acquisition) to the date of maturity or earlier call date. 2011 taxes Then multiply the result by the bond premium (reduced by any bond premium amortization claimed in earlier years). 2011 taxes This gives you your bond premium amortization for the year. 2011 taxes Revenue Ruling 82-10 method. 2011 taxes   Under this method, the amount of your bond premium amortization increases each month over the life of the bond. 2011 taxes This method is explained in Revenue Ruling 82-10, 1982-1 C. 2011 taxes B. 2011 taxes 46. 2011 taxes Choosing To Amortize You choose to amortize the premium on taxable bonds by reporting the amortization for the year on your income tax return for the first tax year you want the choice to apply. 2011 taxes You should attach a statement to your return that you are making this choice under section 171. 2011 taxes See How To Report Amortization, next. 2011 taxes This choice is binding for the year you make it and for later tax years. 2011 taxes It applies to all taxable bonds you own in the year you make the choice and also to those you acquire in later years. 2011 taxes You can change your decision to amortize bond premium only with the written approval of the IRS. 2011 taxes To request approval, use Form 3115. 2011 taxes For more information on requesting approval, see section 5 of the Appendix to Revenue Procedure 2011-14 in Internal Revenue Bulletin 2011-4. 2011 taxes You can find Revenue Procedure 2011-14 at www. 2011 taxes irs. 2011 taxes gov/irb/2011-04_IRB/ar08. 2011 taxes html. 2011 taxes How To Report Amortization Subtract the bond premium amortization from your interest income from these bonds. 2011 taxes Report the bond's interest on Schedule B (Form 1040A or 1040), line 1. 2011 taxes Under your last entry on line 1, put a subtotal of all interest listed on line 1. 2011 taxes Below this subtotal, print “ABP Adjustment,” and the total interest you received. 2011 taxes Subtract this amount from the subtotal, and enter the result on line 2. 2011 taxes Bond premium amortization more than interest. 2011 taxes   If the amount of your bond premium amortization for an accrual period is more than the qualified stated interest for the period, you can deduct the difference as a miscellaneous itemized deduction on Schedule A (Form 1040), line 28. 2011 taxes    But your deduction is limited to the amount by which your total interest inclusions on the bond in prior accrual periods is more than your total bond premium deductions on the bond in prior periods. 2011 taxes Any amount you cannot deduct because of this limit can be carried forward to the next accrual period. 2011 taxes Pre-1998 election to amortize bond premium. 2011 taxes   Generally, if you first elected to amortize bond premium before 1998, the above treatment of the premium does not apply to bonds you acquired before 1988. 2011 taxes Bonds acquired before October 23, 1986. 2011 taxes   The amortization of the premium on these bonds is a miscellaneous itemized deduction not subject to the 2%-of-adjusted-gross-income limit. 2011 taxes Bonds acquired after October 22, 1986, but before 1988. 2011 taxes    The amortization of the premium on these bonds is investment interest expense subject to the investment interest limit, unless you choose to treat it as an offset to interest income on the bond. 2011 taxes Expenses of Producing Income You deduct investment expenses (other than interest expenses) as miscellaneous itemized deductions on Schedule A (Form 1040). 2011 taxes To be deductible, these expenses must be ordinary and necessary expenses paid or incurred: To produce or collect income, or To manage property held for producing income. 2011 taxes The expenses must be directly related to the income or income-producing property, and the income must be taxable to you. 2011 taxes The deduction for most income-producing expenses is subject to a 2% limit that also applies to certain other miscellaneous itemized deductions. 2011 taxes The amount deductible is limited to the total of these miscellaneous deductions that is more than 2% of your adjusted gross income. 2011 taxes For information on how to report expenses of producing income, see How To Report Investment Expenses , later. 2011 taxes Attorney or accounting fees. 2011 taxes   You can deduct attorney or accounting fees that are necessary to produce or collect taxable income. 2011 taxes However, in some cases, attorney or accounting fees are part of the basis of property. 2011 taxes See Basis of Investment Property in chapter 4. 2011 taxes Automatic investment service and dividend reinvestment plans. 2011 taxes   A bank may offer its checking account customers an automatic investment service so that, for a charge, each customer can choose to invest a part of the checking account each month in common stock. 2011 taxes Or a bank that is a dividend disbursing agent for a number of publicly-owned corporations may set up an automatic dividend reinvestment service. 2011 taxes Through that service, cash dividends are reinvested in more shares of stock after the bank deducts a service charge. 2011 taxes   A corporation in which you own stock also may have a dividend reinvestment plan. 2011 taxes This plan lets you choose to use your dividends to buy more shares of stock in the corporation instead of receiving the dividends in cash. 2011 taxes   You can deduct the monthly service charge you pay to a bank to participate in an automatic investment service. 2011 taxes If you participate in a dividend reinvestment plan, you can deduct any service charge subtracted from your cash dividends before the dividends are used to buy more shares of stock. 2011 taxes Deduct the charges in the year you pay them. 2011 taxes Clerical help and office rent. 2011 taxes   You can deduct office expenses, such as rent and clerical help, you incurred in connection with your investments and collecting the taxable income on your investments. 2011 taxes Cost of replacing missing securities. 2011 taxes   To replace your taxable securities that are mislaid, lost, stolen, or destroyed, you may have to post an indemnity bond. 2011 taxes You can deduct the premium you pay to buy the indemnity bond and the related incidental expenses. 2011 taxes   You may, however, get a refund of part of the bond premium if the missing securities are recovered within a specified time. 2011 taxes Under certain types of insurance policies, you can recover some of the expenses. 2011 taxes   If you receive the refund in the tax year you pay the amounts, you can deduct only the difference between the expenses paid and the amount refunded. 2011 taxes If the refund is made in a later tax year, you must include the refund in income in the year you received it, but only to the extent that the expenses decreased your tax in the year you deducted them. 2011 taxes Fees to collect income. 2011 taxes   You can deduct fees you pay to a broker, bank, trustee, or similar agent to collect investment income, such as your taxable bond or mortgage interest, or your dividends on shares of stock. 2011 taxes Fees to buy or sell. 2011 taxes   You cannot deduct a fee you pay to a broker to acquire investment property, such as stocks or bonds. 2011 taxes You must add the fee to the cost of the property. 2011 taxes See Basis of Investment Property in chapter 4. 2011 taxes    You cannot deduct any broker's fees, commissions, or option premiums you pay (or that were netted out) in connection with the sale of investment property. 2011 taxes They can be used only to figure gain or loss from the sale. 2011 taxes See Reporting Capital Gains and Losses , in chapter 4, for more information about the treatment of these sale expenses. 2011 taxes Investment counsel and advice. 2011 taxes   You can deduct fees you pay for counsel and advice about investments that produce taxable income. 2011 taxes This includes amounts you pay for investment advisory services. 2011 taxes Safe deposit box rent. 2011 taxes   You can deduct rent you pay for a safe deposit box if you use the box to store taxable income-producing stocks, bonds, or other investment-related papers and documents. 2011 taxes If you also use the box to store tax-exempt securities or personal items, you can deduct only part of the rent. 2011 taxes See Tax-exempt income under Nondeductible Expenses, later, to figure what part you can deduct. 2011 taxes State and local transfer taxes. 2011 taxes   You cannot deduct the state and local transfer taxes you pay when you buy or sell securities. 2011 taxes If you pay these transfer taxes when you buy securities, you must treat them as part of the cost of the property. 2011 taxes If you pay these transfer taxes when you sell securities, you must treat them as a reduction in the amount realized. 2011 taxes Trustee's commissions for revocable trust. 2011 taxes   If you set up a revocable trust and have its income distributed to you, you can deduct the commission you pay the trustee for managing the trust to the extent it is to produce or collect taxable income or to manage property. 2011 taxes However, you cannot deduct any part of the commission used for producing or collecting tax-exempt income or for managing property that produces tax-exempt income. 2011 taxes   If you are a cash-basis taxpayer and pay the commissions for several years in advance, you must deduct a part of the commission each year. 2011 taxes You cannot deduct the entire amount in the year you pay it. 2011 taxes Investment expenses from pass-through entities. 2011 taxes   If you hold an interest in a partnership, S corporation, real estate mortgage investment conduit (REMIC), or a nonpublicly offered mutual fund, you can deduct your share of that entity's investment expenses. 2011 taxes A partnership or S corporation will show your share of these expenses on your Schedule K-1 (Form 1065) or Schedule K-1 (Form 1120S). 2011 taxes A nonpublicly offered mutual fund will indicate your share of these expenses in box 5 of Form 1099-DIV (or substitute statement). 2011 taxes Publicly-offered mutual funds are discussed later. 2011 taxes   If you hold an interest in a REMIC, any expenses relating to your residual interest investment will be shown on Schedule Q (Form 1066), line 3b. 2011 taxes Any expenses relating to your regular interest investment will appear in box 5 of Form 1099-INT (or substitute statement) or box 9 of Form 1099-OID (or substitute statement). 2011 taxes   Report your share of these investment expenses on Schedule A (Form 1040), subject to the 2% limit, in the same manner as your other investment expenses. 2011 taxes Including mutual fund or REMIC expenses in income. 2011 taxes   Your share of the investment expenses of a REMIC or a nonpublicly offered mutual fund, as described above, are considered to be indirect deductions through that pass-through entity. 2011 taxes You must include in your gross income an amount equal to the expenses allocated to you, whether or not you are able to claim a deduction for those expenses. 2011 taxes If you are a shareholder in a nonpublicly offered mutual fund, you must include on your return the full amount of ordinary dividends or other distributions of stock, as shown in box 1a of Form 1099-DIV (or substitute statement). 2011 taxes If you are a residual interest holder in a REMIC, you must report as ordinary income on Schedule E (Form 1040) the total amounts shown on Schedule Q (Form 1066), lines 1b and 3b. 2011 taxes If you are a REMIC regular interest holder, you must include the amount of any expense allocation you received on Form 1040, line 8a. 2011 taxes Publicly-offered mutual funds. 2011 taxes   Most mutual funds are publicly offered. 2011 taxes These mutual funds, generally, are traded on an established securities exchange. 2011 taxes These funds do not pass investment expenses through to you. 2011 taxes Instead, the dividend income they report to you in box 1a of Form 1099-DIV (or substitute statement) is already reduced by your share of investment expenses. 2011 taxes As a result, you cannot deduct the expenses on your return. 2011 taxes   Include the amount from box 1a of Form 1099-DIV (or substitute statement) in your income. 2011 taxes    A publicly offered mutual fund is one that: Is continuously offered pursuant to a public offering, Is regularly traded on an established securities market, and Is held by or for no fewer than 500 persons at any time during the year. 2011 taxes Contact your mutual fund if you are not sure whether it is publicly offered. 2011 taxes Nondeductible Expenses Some expenses that you incur as an investor are not deductible. 2011 taxes Stockholders' meetings. 2011 taxes   You cannot deduct transportation and other expenses you pay to attend stockholders' meetings of companies in which you have no interest other than owning stock. 2011 taxes This is true even if your purpose in attending is to get information that would be useful in making further investments. 2011 taxes Investment-related seminar. 2011 taxes   You cannot deduct expenses for attending a convention, seminar, or similar meeting for investment purposes. 2011 taxes Single-premium life insurance, endowment, and annuity contracts. 2011 taxes   You cannot deduct interest on money you borrow to buy or carry a single-premium life insurance, endowment, or annuity contract. 2011 taxes Used as collateral. 2011 taxes   If you use a single premium annuity contract as collateral to obtain or continue a mortgage loan, you cannot deduct any interest on the loan that is collateralized by the annuity contract. 2011 taxes Figure the amount of interest expense disallowed by multiplying the current interest rate on the mortgage loan by the lesser of the amount of the annuity contract used as collateral or the amount of the loan. 2011 taxes Borrowing on insurance. 2011 taxes   Generally, you cannot deduct interest on money you borrow to buy or carry a life insurance, endowment, or annuity contract if you plan to systematically borrow part or all of the increases in the cash value of the contract. 2011 taxes This rule applies to the interest on the total amount borrowed to buy or carry the contract, not just the interest on the borrowed increases in the cash value. 2011 taxes Tax-exempt income. 2011 taxes   You cannot deduct expenses you incur to produce tax-exempt income. 2011 taxes Nor can you deduct interest on money you borrow to buy tax-exempt securities or shares in a mutual fund or other regulated investment company that distributes only exempt-interest dividends. 2011 taxes Short-sale expenses. 2011 taxes   The rule disallowing a deduction for interest expenses on tax-exempt securities applies to amounts you pay in connection with personal property used in a short sale or amounts paid by others for the use of any collateral in connection with the short sale. 2011 taxes However, it does not apply to the expenses you incur if you deposit cash as collateral for the property used in the short sale and the cash does not earn a material return during the period of the sale. 2011 taxes Short sales are discussed in Short Sales in chapter 4. 2011 taxes Expenses for both tax-exempt and taxable income. 2011 taxes   You may have expenses that are for both tax-exempt and taxable income. 2011 taxes If you cannot specifically identify what part of the expenses is for each type of income, you can divide the expenses, using reasonable proportions based on facts and circumstances. 2011 taxes You must attach a statement to your return showing how you divided the expenses and stating that each deduction claimed is not based on tax-exempt income. 2011 taxes   One accepted method for dividing expenses is to do it in the same proportion that each type of income is to the total income. 2011 taxes If the expenses relate in part to capital gains and losses, include the gains, but not the losses, in figuring this proportion. 2011 taxes To find the part of the expenses that is for the tax-exempt income, divide your tax-exempt income by the total income and multiply your expenses by the result. 2011 taxes Example. 2011 taxes You received $6,000 interest; $4,800 was tax-exempt and $1,200 was taxable. 2011 taxes In earning this income, you had $500 of expenses. 2011 taxes You cannot specifically identify the amount of each expense item that is for each income item, so you must divide your expenses. 2011 taxes 80% ($4,800 tax-exempt interest divided by $6,000 total interest) of your expenses is for the tax-exempt income. 2011 taxes You cannot deduct $400 (80% of $500) of the expenses. 2011 taxes You can deduct $100 (the rest of the expenses) because they are for the taxable interest. 2011 taxes State income taxes. 2011 taxes   If you itemize your deductions, you can deduct, as taxes, state income taxes on interest income that is exempt from federal income tax. 2011 taxes But you cannot deduct, as either taxes or investment expenses, state income taxes on other exempt income. 2011 taxes Interest expense and carrying charges on straddles. 2011 taxes   You cannot deduct interest and carrying charges allocable to personal property that is part of a straddle. 2011 taxes The nondeductible interest and carrying charges are added to the basis of the straddle property. 2011 taxes However, this treatment does not apply if: All the offsetting positions making up the straddle either consist of one or more qualified covered call options and the optioned stock, or consist of section 1256 contracts (and the straddle is not part of a larger straddle); or The straddle is a hedging transaction. 2011 taxes  For information about straddles, including definitions of the terms used in this discussion, see Straddles in chapter 4. 2011 taxes   Interest includes any amount you pay or incur in connection with personal property used in a short sale. 2011 taxes However, you must first apply the rules discussed in Payments in lieu of dividends under Short Sales in chapter 4. 2011 taxes   To determine the interest on market discount bonds and short-term obligations that are part of a straddle, you must first apply the rules discussed under Limit on interest deduction for market discount bonds and Limit on interest deduction for short-term obligations (both under Interest Expenses, earlier). 2011 taxes Nondeductible amount. 2011 taxes   Figure the nondeductible interest and carrying charges on straddle property as follows. 2011 taxes Add: Interest on indebtedness incurred or continued to buy or carry the personal property, and All other amounts (including charges to insure, store, or transport the personal property) paid or incurred to carry the personal property. 2011 taxes Subtract from the amount in (1): Interest (including OID) includible in gross income for the year on the personal property, Any income from the personal property treated as ordinary income on the disposition of short-term government obligations or as ordinary income under the market discount and short-term bond provisions — see Discount on Debt Instruments in chapter 1, The dividends includible in gross income for the year from the personal property, and Any payment on a loan of the personal property for use in a short sale that is includible in gross income. 2011 taxes Basis adjustment. 2011 taxes   Add the nondeductible amount to the basis of your straddle property. 2011 taxes How To Report Investment Expenses To deduct your investment expenses, you must itemize deductions on Schedule A (Form 1040). 2011 taxes Enter your deductible investment interest expense on Schedule A (Form1040), line 14. 2011 taxes Include any deductible short sale expenses. 2011 taxes (See Short Sales in chapter 4 for information on these expenses. 2011 taxes ) Also attach a completed Form 4952 if you used that form to figure your investment interest expense. 2011 taxes Enter the total amount of your other investment expenses (other than interest expenses) on Schedule A (Form 1040), line 23. 2011 taxes List the type and amount of each expense on the dotted lines next to line 23. 2011 taxes (If necessary, you can show the required information on an attached statement. 2011 taxes ) For information on how to report amortizable bond premium, see Bond Premium Amortization , earlier in this chapter. 2011 taxes When To Report Investment Expenses If you use the cash method to report income and expenses, you generally deduct your expenses, except for certain prepaid interest, in the year you pay them. 2011 taxes If you use an accrual method, you generally deduct your expenses when you incur a liability for them, rather than when you pay them. 2011 taxes Also see When To Deduct Investment Interest , earlier in this chapter. 2011 taxes Unpaid expenses owed to related party. 2011 taxes   If you use an accrual method, you cannot deduct interest and other expenses owed to a related cash-basis person until payment is made and the amount is includible in the gross income of that person. 2011 taxes The relationship, for purposes of this rule, is determined as of the end of the tax year for which the interest or expense would otherwise be deductible. 2011 taxes If a deduction is denied under this rule, this rule will continue to apply even if your relationship with the person ceases to exist before the amount is includible in the gross income of that person. 2011 taxes   This rule generally applies to those relationships listed in chapter 4 under Related Party Transactions . 2011 taxes It also applies to accruals by partnerships to partners, partners to partnerships, shareholders to S corporations, and S corporations to shareholders. 2011 taxes   The postponement of deductions for unpaid expenses and interest under the related party rule does not apply to OID, regardless of when payment is made. 2011 taxes This rule also does not apply to loans with below-market interest rates or to certain payments for the use of property and services when the lender or recipient has to include payments periodically in income, even if a payment has not been made. 2011 taxes Prev  Up  Next   Home   More Online Publications