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2012taxes 4. 2012taxes Interest Table of Contents Introduction Topics - This chapter discusses: Useful Items - You may want to see: Allocation of InterestOrder of funds spent. 2012taxes Payments from checking accounts. 2012taxes Amounts paid within 30 days. 2012taxes Optional method for determining date of reallocation. 2012taxes Interest on a segregated account. 2012taxes How to report. 2012taxes Interest You Can DeductStatement. 2012taxes Expenses paid to obtain a mortgage. 2012taxes Prepayment penalty. 2012taxes De minimis OID. 2012taxes Constant-yield method. 2012taxes Loan or mortgage ends. 2012taxes Interest You Cannot DeductPenalties. 2012taxes Who is a key person? Exceptions for pre-June 1997 contracts. 2012taxes Interest allocated to unborrowed policy cash value. 2012taxes Capitalization of Interest When To Deduct InterestPrepaid interest. 2012taxes Discounted loan. 2012taxes Refunds of interest. 2012taxes Prepaid interest. 2012taxes Discounted loan. 2012taxes Tax deficiency. 2012taxes Related person. 2012taxes Below-Market LoansLimit on forgone interest for gift loans of $100,000 or less. 2012taxes Introduction This chapter discusses the tax treatment of business interest expense. 2012taxes Business interest expense is an amount charged for the use of money you borrowed for business activities. 2012taxes Topics - This chapter discusses: Allocation of interest Interest you can deduct Interest you cannot deduct Capitalization of interest When to deduct interest Below-market loans Useful Items - You may want to see: Publication 537 Installment Sales 550 Investment Income and Expenses 936 Home Mortgage Interest Deduction Form (and Instructions) Sch A (Form 1040) Itemized Deductions Sch E (Form 1040) Supplemental Income and Loss Sch K-1 (Form 1065) Partner's Share of Income, Deductions, Credits, etc. 2012taxes Sch K-1 (Form 1120S) Shareholder's Share of Income, Deductions, Credits, etc. 2012taxes 1098 Mortgage Interest Statement 3115 Application for Change in Accounting Method 4952 Investment Interest Expense Deduction 8582 Passive Activity Loss Limitations See chapter 12 for information about getting publications and forms. 2012taxes Allocation of Interest The rules for deducting interest vary, depending on whether the loan proceeds are used for business, personal, or investment activities. 2012taxes If you use the proceeds of a loan for more than one type of expense, you must allocate the interest based on the use of the loan's proceeds. 2012taxes Allocate your interest expense to the following categories. 2012taxes Nonpassive trade or business activity interest Passive trade or business activity interest Investment interest Portfolio interest Personal interest In general, you allocate interest on a loan the same way you allocate the loan proceeds. 2012taxes You allocate loan proceeds by tracing disbursements to specific uses. 2012taxes The easiest way to trace disbursements to specific uses is to keep the proceeds of a particular loan separate from any other funds. 2012taxes Secured loan. 2012taxes The allocation of loan proceeds and the related interest is not generally affected by the use of property that secures the loan. 2012taxes Example. 2012taxes You secure a loan with property used in your business. 2012taxes You use the loan proceeds to buy an automobile for personal use. 2012taxes You must allocate interest expense on the loan to personal use (purchase of the automobile) even though the loan is secured by business property. 2012taxes If the property that secures the loan is your home, you generally do not allocate the loan proceeds or the related interest. 2012taxes The interest is usually deductible as qualified home mortgage interest, regardless of how the loan proceeds are used. 2012taxes For more information, see Publication 936. 2012taxes Allocation period. 2012taxes The period for which a loan is allocated to a particular use begins on the date the proceeds are used and ends on the earlier of the following dates. 2012taxes The date the loan is repaid. 2012taxes The date the loan is reallocated to another use. 2012taxes Proceeds not disbursed to borrower. 2012taxes Even if the lender disburses the loan proceeds to a third party, the allocation of the loan is still based on your use of the funds. 2012taxes This applies whether you pay for property, services, or anything else by incurring a loan, or you take property subject to a debt. 2012taxes Proceeds deposited in borrower's account. 2012taxes Treat loan proceeds deposited in an account as property held for investment. 2012taxes It does not matter whether the account pays interest. 2012taxes Any interest you pay on the loan is investment interest expense. 2012taxes If you withdraw the proceeds of the loan, you must reallocate the loan based on the use of the funds. 2012taxes Example. 2012taxes Celina, a calendar-year taxpayer, borrows $100,000 on January 4 and immediately uses the proceeds to open a checking account. 2012taxes No other amounts are deposited in the account during the year and no part of the loan principal is repaid during the year. 2012taxes On April 2, Celina uses $20,000 from the checking account for a passive activity expenditure. 2012taxes On September 4, Celina uses an additional $40,000 from the account for personal purposes. 2012taxes Under the interest allocation rules, the entire $100,000 loan is treated as property held for investment for the period from January 4 through April 1. 2012taxes From April 2 through September 3, Celina must treat $20,000 of the loan as used in the passive activity and $80,000 of the loan as property held for investment. 2012taxes From September 4 through December 31, she must treat $40,000 of the loan as used for personal purposes, $20,000 as used in the passive activity, and $40,000 as property held for investment. 2012taxes Order of funds spent. 2012taxes Generally, you treat loan proceeds deposited in an account as used (spent) before either of the following amounts. 2012taxes Any unborrowed amounts held in the same account. 2012taxes Any amounts deposited after these loan proceeds. 2012taxes Example. 2012taxes On January 9, Olena opened a checking account, depositing $500 of the proceeds of Loan A and $1,000 of unborrowed funds. 2012taxes The following table shows the transactions in her account during the tax year. 2012taxes Date Transaction January 9 $500 proceeds of Loan A and $1,000 unborrowed funds deposited January 14 $500 proceeds of Loan B deposited February 19 $800 used for personal purposes February 27 $700 used for passive activity June 19 $1,000 proceeds of Loan C deposited November 20 $800 used for an investment December 18 $600 used for personal purposes Olena treats the $800 used for personal purposes as made from the $500 proceeds of Loan A and $300 of the proceeds of Loan B. 2012taxes She treats the $700 used for a passive activity as made from the remaining $200 proceeds of Loan B and $500 of unborrowed funds. 2012taxes She treats the $800 used for an investment as made entirely from the proceeds of Loan C. 2012taxes She treats the $600 used for personal purposes as made from the remaining $200 proceeds of Loan C and $400 of unborrowed funds. 2012taxes For the periods during which loan proceeds are held in the account, Olena treats them as property held for investment. 2012taxes Payments from checking accounts. 2012taxes Generally, you treat a payment from a checking or similar account as made at the time the check is written if you mail or deliver it to the payee within a reasonable period after you write it. 2012taxes You can treat checks written on the same day as written in any order. 2012taxes Amounts paid within 30 days. 2012taxes 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. 2012taxes This applies to any payment made within 30 days before or after the proceeds are received in cash or deposited in your account. 2012taxes If the loan proceeds are deposited in an account, you can apply this rule even if the rules stated earlier under Order of funds spent would otherwise require you to treat the proceeds as used for other purposes. 2012taxes If you apply this rule to any payments, disregard those payments (and the proceeds from which they are made) when applying the rules stated under Order of funds spent. 2012taxes 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. 2012taxes Example. 2012taxes Giovanni gets a loan of $1,000 on August 4 and receives the proceeds in cash. 2012taxes Giovanni deposits $1,500 in an account on August 18 and on August 28 writes a check on the account for a passive activity expense. 2012taxes Also, Giovanni deposits his paycheck, deposits other loan proceeds, and pays his bills during the same period. 2012taxes Regardless of these other transactions, Giovanni can treat $1,000 of the deposit he made on August 18 as being paid on August 4 from the loan proceeds. 2012taxes In addition, Giovanni can treat the passive activity expense he paid on August 28 as made from the $1,000 loan proceeds treated as deposited in the account. 2012taxes Optional method for determining date of reallocation. 2012taxes You can use the following method to determine the date loan proceeds are reallocated to another use. 2012taxes You can treat all payments from loan proceeds in the account during any month as taking place on the later of the following dates. 2012taxes The first day of that month. 2012taxes The date the loan proceeds are deposited in the account. 2012taxes However, you can use this optional method only if you treat all payments from the account during the same calendar month in the same way. 2012taxes Interest on a segregated account. 2012taxes If you have an account that contains only loan proceeds and interest earned on the account, you can treat any payment from that account as being made first from the interest. 2012taxes When the interest earned is used up, any remaining payments are from loan proceeds. 2012taxes Example. 2012taxes You borrowed $20,000 and used the proceeds of this loan to open a new savings account. 2012taxes When the account had earned interest of $867, you withdrew $20,000 for personal purposes. 2012taxes You can treat the withdrawal as coming first from the interest earned on the account, $867, and then from the loan proceeds, $19,133 ($20,000 − $867). 2012taxes All the interest charged on the loan from the time it was deposited in the account until the time of the withdrawal is investment interest expense. 2012taxes The interest charged on the part of the proceeds used for personal purposes ($19,133) from the time you withdrew it until you either repay it or reallocate it to another use is personal interest expense. 2012taxes The interest charged on the loan proceeds you left in the account ($867) continues to be investment interest expense until you either repay it or reallocate it to another use. 2012taxes Loan repayment. 2012taxes When you repay any part of a loan allocated to more than one use, treat it as being repaid in the following order. 2012taxes Personal use. 2012taxes Investments and passive activities (other than those included in (3)). 2012taxes Passive activities in connection with a rental real estate activity in which you actively participate. 2012taxes Former passive activities. 2012taxes Trade or business use and expenses for certain low-income housing projects. 2012taxes Line of credit (continuous borrowings). 2012taxes The following rules apply if you have a line of credit or similar arrangement. 2012taxes Treat all borrowed funds on which interest accrues at the same fixed or variable rate as a single loan. 2012taxes Treat borrowed funds or parts of borrowed funds on which interest accrues at different fixed or variable rates as different loans. 2012taxes Treat these loans as repaid in the order shown on the loan agreement. 2012taxes Loan refinancing. 2012taxes Allocate the replacement loan to the same uses to which the repaid loan was allocated. 2012taxes Make the allocation only to the extent you use the proceeds of the new loan to repay any part of the original loan. 2012taxes Debt-financed distribution. 2012taxes A debt-financed distribution occurs when a partnership or S corporation borrows funds and allocates those funds to distributions made to partners or shareholders. 2012taxes The manner in which you report the interest expense associated with the distributed debt proceeds depends on your use of those proceeds. 2012taxes How to report. 2012taxes If the proceeds were used in a nonpassive trade or business activity, report the interest on Schedule E (Form 1040), line 28; enter “interest expense” and the name of the partnership or S corporation in column (a) and the amount in column (h). 2012taxes If the proceeds were used in a passive activity, follow the Instructions for Form 8582, Passive Activity Loss Limitations, to determine the amount of interest expense that can be reported on Schedule E (Form 1040), line 28; enter “interest expense” and the name of the partnership in column (a) and the amount in column (f). 2012taxes If the proceeds were used in an investment activity, enter the interest on Form 4952. 2012taxes If the proceeds are used for personal purposes, the interest is generally not deductible. 2012taxes Interest You Can Deduct You can generally deduct as a business expense all interest you pay or accrue during the tax year on debts related to your trade or business. 2012taxes Interest relates to your trade or business if you use the proceeds of the loan for a trade or business expense. 2012taxes It does not matter what type of property secures the loan. 2012taxes You can deduct interest on a debt only if you meet all the following requirements. 2012taxes You are legally liable for that debt. 2012taxes Both you and the lender intend that the debt be repaid. 2012taxes You and the lender have a true debtor-creditor relationship. 2012taxes Partial liability. 2012taxes If you are liable for part of a business debt, you can deduct only your share of the total interest paid or accrued. 2012taxes Example. 2012taxes You and your brother borrow money. 2012taxes You are liable for 50% of the note. 2012taxes You use your half of the loan in your business, and you make one-half of the loan payments. 2012taxes You can deduct your half of the total interest payments as a business deduction. 2012taxes Mortgage. 2012taxes Generally, mortgage interest paid or accrued on real estate you own legally or equitably is deductible. 2012taxes However, rather than deducting the interest currently, you may have to add it to the cost basis of the property as explained later under Capitalization of Interest. 2012taxes Statement. 2012taxes If you paid $600 or more of mortgage interest (including certain points) during the year on any one mortgage, you generally will receive a Form 1098 or a similar statement. 2012taxes You will receive the statement if you pay interest to a person (including a financial institution or a cooperative housing corporation) in the course of that person's trade or business. 2012taxes A governmental unit is a person for purposes of furnishing the statement. 2012taxes If you receive a refund of interest you overpaid in an earlier year, this amount will be reported in box 3 of Form 1098. 2012taxes You cannot deduct this amount. 2012taxes For information on how to report this refund, see Refunds of interest, later in this chapter. 2012taxes Expenses paid to obtain a mortgage. 2012taxes Certain expenses you pay to obtain a mortgage cannot be deducted as interest. 2012taxes These expenses, which include mortgage commissions, abstract fees, and recording fees, are capital expenses. 2012taxes If the property mortgaged is business or income-producing property, you can amortize the costs over the life of the mortgage. 2012taxes Prepayment penalty. 2012taxes If you pay off your mortgage early and pay the lender a penalty for doing this, you can deduct the penalty as interest. 2012taxes Interest on employment tax deficiency. 2012taxes Interest charged on employment taxes assessed on your business is deductible. 2012taxes Original issue discount (OID). 2012taxes OID is a form of interest. 2012taxes A loan (mortgage or other debt) generally has OID when its proceeds are less than its principal amount. 2012taxes The OID is the difference between the stated redemption price at maturity and the issue price of the loan. 2012taxes A loan's stated redemption price at maturity is the sum of all amounts (principal and interest) payable on it other than qualified stated interest. 2012taxes Qualified stated interest is stated interest that is unconditionally payable in cash or property (other than another loan of the issuer) at least annually over the term of the loan at a single fixed rate. 2012taxes You generally deduct OID over the term of the loan. 2012taxes Figure the amount to deduct each year using the constant-yield method, unless the OID on the loan is de minimis. 2012taxes De minimis OID. 2012taxes The OID is de minimis if it is less than one-fourth of 1% (. 2012taxes 0025) of the stated redemption price of the loan at maturity multiplied by the number of full years from the date of original issue to maturity (the term of the loan). 2012taxes If the OID is de minimis, you can choose one of the following ways to figure the amount you can deduct each year. 2012taxes On a constant-yield basis over the term of the loan. 2012taxes On a straight-line basis over the term of the loan. 2012taxes In proportion to stated interest payments. 2012taxes In its entirety at maturity of the loan. 2012taxes You make this choice by deducting the OID in a manner consistent with the method chosen on your timely filed tax return for the tax year in which the loan is issued. 2012taxes Example. 2012taxes On January 1, 2013, you took out a $100,000 discounted loan and received $98,500 in proceeds. 2012taxes The loan will mature on January 1, 2023 (a 10-year term), and the $100,000 principal is payable on that date. 2012taxes Interest of $10,000 is payable on January 1 of each year, beginning January 1, 2014. 2012taxes The $1,500 OID on the loan is de minimis because it is less than $2,500 ($100,000 × . 2012taxes 0025 × 10). 2012taxes You choose to deduct the OID on a straight-line basis over the term of the loan. 2012taxes Beginning in 2013, you can deduct $150 each year for 10 years. 2012taxes Constant-yield method. 2012taxes If the OID is not de minimis, you must use the constant-yield method to figure how much you can deduct each year. 2012taxes You figure your deduction for the first year using the following steps. 2012taxes Determine the issue price of the loan. 2012taxes Generally, this equals the proceeds of the loan. 2012taxes If you paid points on the loan (as discussed later), the issue price generally is the difference between the proceeds and the points. 2012taxes Multiply the result in (1) by the yield to maturity. 2012taxes Subtract any qualified stated interest payments from the result in (2). 2012taxes This is the OID you can deduct in the first year. 2012taxes To figure your deduction in any subsequent year, follow the above steps, except determine the adjusted issue price in step (1). 2012taxes To get the adjusted issue price, add to the issue price any OID previously deducted. 2012taxes Then follow steps (2) and (3) above. 2012taxes The yield to maturity is generally shown in the literature you receive from your lender. 2012taxes If you do not have this information, consult your lender or tax advisor. 2012taxes In general, the yield to maturity is the discount rate that, when used in computing the present value of all principal and interest payments, produces an amount equal to the principal amount of the loan. 2012taxes Example. 2012taxes The facts are the same as in the previous example, except that you deduct the OID on a constant yield basis over the term of the loan. 2012taxes The yield to maturity on your loan is 10. 2012taxes 2467%, compounded annually. 2012taxes For 2013, you can deduct $93 [($98,500 × . 2012taxes 102467) − $10,000]. 2012taxes For 2014, you can deduct $103 [($98,593 × . 2012taxes 102467) − $10,000]. 2012taxes Loan or mortgage ends. 2012taxes If your loan or mortgage ends, you may be able to deduct any remaining OID in the tax year in which the loan or mortgage ends. 2012taxes A loan or mortgage may end due to a refinancing, prepayment, foreclosure, or similar event. 2012taxes If you refinance with the original lender, you generally cannot deduct the remaining OID in the year in which the refinancing occurs, but you may be able to deduct it over the term of the new mortgage or loan. 2012taxes See Interest paid with funds borrowed from original lender under Interest You Cannot Deduct, later. 2012taxes Points. 2012taxes The term “points” is used to describe certain charges paid, or treated as paid, by a borrower to obtain a loan or a mortgage. 2012taxes These charges are also called loan origination fees, maximum loan charges, discount points, or premium charges. 2012taxes If any of these charges (points) are solely for the use of money, they are interest. 2012taxes Because points are prepaid interest, you generally cannot deduct the full amount in the year paid. 2012taxes However, you can choose to fully deduct points in the year paid if you meet certain tests. 2012taxes For exceptions to the general rule, see Publication 936. 2012taxes The points reduce the issue price of the loan and result in original issue discount (OID), deductible as explained in the preceding discussion. 2012taxes Partial payments on a nontax debt. 2012taxes If you make partial payments on a debt (other than a debt owed the IRS), the payments are applied, in general, first to interest and any remainder to principal. 2012taxes You can deduct only the interest. 2012taxes This rule does not apply when it can be inferred that the borrower and lender understood that a different allocation of the payments would be made. 2012taxes Installment purchase. 2012taxes If you make an installment purchase of business property, the contract between you and the seller generally provides for the payment of interest. 2012taxes If no interest or a low rate of interest is charged under the contract, a portion of the stated principal amount payable under the contract may be recharacterized as interest (unstated interest). 2012taxes The amount recharacterized as interest reduces your basis in the property and increases your interest expense. 2012taxes For more information on installment sales and unstated interest, see Publication 537. 2012taxes Interest You Cannot Deduct Certain interest payments cannot be deducted. 2012taxes In addition, certain other expenses that may seem to be interest but are not, cannot be deducted as interest. 2012taxes You cannot currently deduct interest that must be capitalized, and you generally cannot deduct personal interest. 2012taxes Interest paid with funds borrowed from original lender. 2012taxes If you use the cash method of accounting, you cannot deduct interest you pay with funds borrowed from the original lender through a second loan, an advance, or any other arrangement similar to a loan. 2012taxes You can deduct the interest expense once you start making payments on the new loan. 2012taxes When you make a payment on the new loan, you first apply the payment to interest and then to the principal. 2012taxes All amounts you apply to the interest on the first loan are deductible, along with any interest you pay on the second loan, subject to any limits that apply. 2012taxes Capitalized interest. 2012taxes You cannot currently deduct interest you are required to capitalize under the uniform capitalization rules. 2012taxes See Capitalization of Interest, later. 2012taxes In addition, if you buy property and pay interest owed by the seller (for example, by assuming the debt and any interest accrued on the property), you cannot deduct the interest. 2012taxes Add this interest to the basis of the property. 2012taxes Commitment fees or standby charges. 2012taxes Fees you incur to have business funds available on a standby basis, but not for the actual use of the funds, are not deductible as interest payments. 2012taxes You may be able to deduct them as business expenses. 2012taxes If the funds are for inventory or certain property used in your business, the fees are indirect costs and you generally must capitalize them under the uniform capitalization rules. 2012taxes See Capitalization of Interest, later. 2012taxes Interest on income tax. 2012taxes Interest charged on income tax assessed on your individual income tax return is not a business deduction even though the tax due is related to income from your trade or business. 2012taxes Treat this interest as a business deduction only in figuring a net operating loss deduction. 2012taxes Penalties. 2012taxes Penalties on underpaid deficiencies and underpaid estimated tax are not interest. 2012taxes You cannot deduct them. 2012taxes Generally, you cannot deduct any fines or penalties. 2012taxes Interest on loans with respect to life insurance policies. 2012taxes You generally cannot deduct interest on a debt incurred with respect to any life insurance, annuity, or endowment contract that covers any individual unless that individual is a key person. 2012taxes If the policy or contract covers a key person, you can deduct the interest on up to $50,000 of debt for that person. 2012taxes However, the deduction for any month cannot be more than the interest figured using Moody's Composite Yield on Seasoned Corporate Bonds (formerly known as Moody's Corporate Bond Yield Average-Monthly Average Corporates) (Moody's rate) for that month. 2012taxes Who is a key person? A key person is an officer or 20% owner. 2012taxes However, the number of individuals you can treat as key persons is limited to the greater of the following. 2012taxes Five individuals. 2012taxes The lesser of 5% of the total officers and employees of the company or 20 individuals. 2012taxes Exceptions for pre-June 1997 contracts. 2012taxes You can generally deduct the interest if the contract was issued before June 9, 1997, and the covered individual is someone other than an employee, officer, or someone financially interested in your business. 2012taxes If the contract was purchased before June 21, 1986, you can generally deduct the interest no matter who is covered by the contract. 2012taxes Interest allocated to unborrowed policy cash value. 2012taxes Corporations and partnerships generally cannot deduct any interest expense allocable to unborrowed cash values of life insurance, annuity, or endowment contracts. 2012taxes This rule applies to contracts issued after June 8, 1997, that cover someone other than an officer, director, employee, or 20% owner. 2012taxes For more information, see section 264(f) of the Internal Revenue Code. 2012taxes Capitalization of Interest Under the uniform capitalization rules, you generally must capitalize interest on debt equal to your expenditures to produce real property or certain tangible personal property. 2012taxes The property must be produced by you for use in your trade or business or for sale to customers. 2012taxes You cannot capitalize interest related to property that you acquire in any other manner. 2012taxes Interest you paid or incurred during the production period must be capitalized if the property produced is designated property. 2012taxes Designated property is any of the following. 2012taxes Real property. 2012taxes Tangible personal property with a class life of 20 years or more. 2012taxes Tangible personal property with an estimated production period of more than 2 years. 2012taxes Tangible personal property with an estimated production period of more than 1 year if the estimated cost of production is more than $1 million. 2012taxes Property you produce. 2012taxes You produce property if you construct, build, install, manufacture, develop, improve, create, raise, or grow it. 2012taxes Treat property produced for you under a contract as produced by you up to the amount you pay or incur for the property. 2012taxes Carrying charges. 2012taxes Carrying charges include taxes you pay to carry or develop real estate or to carry, transport, or install personal property. 2012taxes You can choose to capitalize carrying charges not subject to the uniform capitalization rules if they are otherwise deductible. 2012taxes For more information, see chapter 7. 2012taxes Capitalized interest. 2012taxes Treat capitalized interest as a cost of the property produced. 2012taxes You recover your interest when you sell or use the property. 2012taxes If the property is inventory, recover capitalized interest through cost of goods sold. 2012taxes If the property is used in your trade or business, recover capitalized interest through an adjustment to basis, depreciation, amortization, or other method. 2012taxes Partnerships and S corporations. 2012taxes The interest capitalization rules are applied first at the partnership or S corporation level. 2012taxes The rules are then applied at the partners' or shareholders' level to the extent the partnership or S corporation has insufficient debt to support the production or construction costs. 2012taxes If you are a partner or a shareholder, you may have to capitalize interest you incur during the tax year for the production costs of the partnership or S corporation. 2012taxes You may also have to capitalize interest incurred by the partnership or S corporation for your own production costs. 2012taxes To properly capitalize interest under these rules, you must be given the required information in an attachment to the Schedule K-1 you receive from the partnership or S corporation. 2012taxes Additional information. 2012taxes The procedures for applying the uniform capitalization rules are beyond the scope of this publication. 2012taxes For more information, see sections 1. 2012taxes 263A-8 through 1. 2012taxes 263A-15 of the regulations and Notice 88-99. 2012taxes Notice 88-99 is in Cumulative Bulletin 1988-2. 2012taxes When To Deduct Interest If the uniform capitalization rules, discussed under Capitalization of Interest, earlier, do not apply to you, deduct interest as follows. 2012taxes Cash method. 2012taxes Under the cash method, you can generally deduct only the interest you actually paid during the tax year. 2012taxes You cannot deduct a promissory note you gave as payment because it is a promise to pay and not an actual payment. 2012taxes Prepaid interest. 2012taxes You generally cannot deduct any interest paid before the year it is due. 2012taxes Interest paid in advance can be deducted only in the tax year in which it is due. 2012taxes Discounted loan. 2012taxes If interest or a discount is subtracted from your loan proceeds, it is not a payment of interest and you cannot deduct it when you get the loan. 2012taxes For more information, see Original issue discount (OID) under Interest You Can Deduct, earlier. 2012taxes Refunds of interest. 2012taxes If you pay interest and then receive a refund in the same tax year of any part of the interest, reduce your interest deduction by the refund. 2012taxes If you receive the refund in a later tax year, include the refund in your income to the extent the deduction for the interest reduced your tax. 2012taxes Accrual method. 2012taxes Under an accrual method, you can deduct only interest that has accrued during the tax year. 2012taxes Prepaid interest. 2012taxes See Prepaid interest, earlier. 2012taxes Discounted loan. 2012taxes See Discounted loan, earlier. 2012taxes Tax deficiency. 2012taxes If you contest a federal income tax deficiency, interest does not accrue until the tax year the final determination of liability is made. 2012taxes If you do not contest the deficiency, then the interest accrues in the year the tax was asserted and agreed to by you. 2012taxes However, if you contest but pay the proposed tax deficiency and interest, and you do not designate the payment as a cash bond, then the interest is deductible in the year paid. 2012taxes Related person. 2012taxes If you use an accrual method, you cannot deduct interest owed to a related person who uses the cash method until payment is made and the interest is includible in the gross income of that person. 2012taxes The relationship is determined as of the end of the tax year for which the interest would otherwise be deductible. 2012taxes See section 267 of the Internal Revenue Code for more information. 2012taxes Below-Market Loans If you receive a below-market gift or demand loan and use the proceeds in your trade or business, you may be able to deduct the forgone interest. 2012taxes See Treatment of gift and demand loans, later, in this discussion. 2012taxes A below-market loan is a loan on which no interest is charged or on which interest is charged at a rate below the applicable federal rate. 2012taxes A gift or demand loan that is a below-market loan generally is considered an arm's-length transaction in which you, the borrower, are considered as having received both the following. 2012taxes A loan in exchange for a note that requires the payment of interest at the applicable federal rate. 2012taxes An additional payment in an amount equal to the forgone interest. 2012taxes The additional payment is treated as a gift, dividend, contribution to capital, payment of compensation, or other payment, depending on the substance of the transaction. 2012taxes Forgone interest. 2012taxes For any period, forgone interest is The interest that would be payable for that period if interest accrued on the loan at the applicable federal rate and was payable annually on December 31, minus Any interest actually payable on the loan for the period. 2012taxes Applicable federal rates are published by the IRS each month in the Internal Revenue Bulletin. 2012taxes Internal Revenue Bulletins are available on the IRS web site at www. 2012taxes irs. 2012taxes gov/irb. 2012taxes You can also contact an IRS office to get these rates. 2012taxes Loans subject to the rules. 2012taxes The rules for below-market loans apply to the following. 2012taxes Gift loans (below-market loans where the forgone interest is in the nature of a gift). 2012taxes Compensation-related loans (below-market loans between an employer and an employee or between an independent contractor and a person for whom the contractor provides services). 2012taxes Corporation-shareholder loans. 2012taxes Tax avoidance loans (below-market loans where the avoidance of federal tax is one of the main purposes of the interest arrangement). 2012taxes Loans to qualified continuing care facilities under a continuing care contract (made after October 11, 1985). 2012taxes Except as noted in (5) above, these rules apply to demand loans (loans payable in full at any time upon the lender's demand) outstanding after June 6, 1984, and to term loans (loans that are not demand loans) made after that date. 2012taxes Treatment of gift and demand loans. 2012taxes If you receive a below-market gift loan or demand loan, you are treated as receiving an additional payment (as a gift, dividend, etc. 2012taxes ) equal to the forgone interest on the loan. 2012taxes You are then treated as transferring this amount back to the lender as interest. 2012taxes These transfers are considered to occur annually, generally on December 31. 2012taxes If you use the loan proceeds in your trade or business, you can deduct the forgone interest each year as a business interest expense. 2012taxes The lender must report it as interest income. 2012taxes Limit on forgone interest for gift loans of $100,000 or less. 2012taxes For gift loans between individuals, forgone interest treated as transferred back to the lender is limited to the borrower's net investment income for the year. 2012taxes This limit applies if the outstanding loans between the lender and borrower total $100,000 or less. 2012taxes If the borrower's net investment income is $1,000 or less, it is treated as zero. 2012taxes This limit does not apply to a loan if the avoidance of any federal tax is one of the main purposes of the interest arrangement. 2012taxes Treatment of term loans. 2012taxes If you receive a below-market term loan other than a gift or demand loan, you are treated as receiving an additional cash payment (as a dividend, etc. 2012taxes ) on the date the loan is made. 2012taxes This payment is equal to the loan amount minus the present value, at the applicable federal rate, of all payments due under the loan. 2012taxes The same amount is treated as original issue discount on the loan. 2012taxes See Original issue discount (OID) under Interest You Can Deduct, earlier. 2012taxes Exceptions for loans of $10,000 or less. 2012taxes The rules for below-market loans do not apply to any day on which the total outstanding loans between the borrower and lender is $10,000 or less. 2012taxes This exception applies only to the following. 2012taxes Gift loans between individuals if the loan is not directly used to buy or carry income-producing assets. 2012taxes Compensation-related loans or corporation-shareholder loans if the avoidance of any federal tax is not a principal purpose of the interest arrangement. 2012taxes This exception does not apply to a term loan described in (2) above that was previously subject to the below-market loan rules. 2012taxes Those rules will continue to apply even if the outstanding balance is reduced to $10,000 or less. 2012taxes Exceptions for loans without significant tax effect. 2012taxes The following loans are specifically exempted from the rules for below-market loans because their interest arrangements do not have a significant effect on the federal tax liability of the borrower or the lender. 2012taxes Loans made available by lenders to the general public on the same terms and conditions that are consistent with the lender's customary business practices. 2012taxes Loans subsidized by a federal, state, or municipal government that are made available under a program of general application to the public. 2012taxes Certain employee-relocation loans. 2012taxes Certain loans to or from a foreign person, unless the interest income would be effectively connected with the conduct of a U. 2012taxes S. 2012taxes trade or business and not exempt from U. 2012taxes S. 2012taxes tax under an income tax treaty. 2012taxes Any other loan if the taxpayer can show that the interest arrangement has no significant effect on the federal tax liability of the lender or the borrower. 2012taxes Whether an interest arrangement has a significant effect on the federal tax liability of the lender or the borrower will be determined by all the facts and circumstances. 2012taxes Consider all the following factors. 2012taxes Whether items of income and deduction generated by the loan offset each other. 2012taxes The amount of the items. 2012taxes The cost of complying with the below-market loan provisions if they were to apply. 2012taxes Any reasons, other than taxes, for structuring the transaction as a below-market loan. 2012taxes Exception for loans to qualified continuing care facilities. 2012taxes The below-market interest rules do not apply to a loan owed by a qualified continuing care facility under a continuing care contract if the lender or lender's spouse is age 62 or older by the end of the calendar year. 2012taxes A qualified continuing care facility is one or more facilities (excluding nursing homes) meeting the requirements listed below. 2012taxes Designed to provide services under continuing care contracts (defined below). 2012taxes Includes an independent living unit, and either an assisted living or nursing facility, or both. 2012taxes Substantially all of the independent living unit residents are covered by continuing care contracts. 2012taxes A continuing care contract is a written contract between an individual and a qualified continuing care facility that includes all of the following conditions. 2012taxes The individual or individual's spouse must be entitled to use the facility for the rest of their life or lives. 2012taxes The individual or individual's spouse will be provided with housing, as appropriate for the health of the individual or individual's spouse in an: independent living unit (which has additional available facilities outside the unit for the provision of meals and other personal care), and assisted living or nursing facility available in the continuing care facility. 2012taxes The individual or individual's spouse will be provided with assisted living or nursing care available in the continuing care facility, as required for the health of the individual or the individual's spouse. 2012taxes For more information, see section 7872(h) of the Internal Revenue Code. 2012taxes Sale or exchange of property. 2012taxes Different rules generally apply to a loan connected with the sale or exchange of property. 2012taxes If the loan does not provide adequate stated interest, part of the principal payment may be considered interest. 2012taxes However, there are exceptions that may require you to apply the below-market interest rate rules to these loans. 2012taxes See Unstated Interest and Original Issue Discount (OID) in Publication 537. 2012taxes More information. 2012taxes For more information on below-market loans, see section 7872 of the Internal Revenue Code and section 1. 2012taxes 7872-5 of the regulations. 2012taxes Prev Up Next Home More Online Publications
Report Name Change before You File Taxes
IRS Tax Tip 2014-08, February 6, 2014
Did you change your name last year? Did your dependent have a name change? If the answer to either question is yes, be sure to notify the Social Security Administration before you file your tax return with the IRS.
This is important because the name on your tax return must match SSA records. If they don’t, you’re likely to get a letter from the IRS about the mismatch. And if you expect a refund, this may delay when you’ll get it.
Be sure to contact SSA if:
- You got married or divorced and you changed your name.
- A dependent you claim had a name change. For example, this would apply if you adopted a child and that child’s last name changed.
File Form SS-5, Application for a Social Security Card, with the SSA to let them know about a name change. You can get the form on SSA.gov by calling 800-772-1213 or at an SSA office.
You can file Form SS-5 at an SSA office or by mail. Your new card will have the same SSN as before but will show your new name.
If you have an adopted child who does not have a SSN, use a temporary Adoption Taxpayer Identification Number on your tax form. You can apply for an ATIN by filing Form W-7A, Application for Taxpayer Identification Number for Pending U.S. Adoptions, with the IRS. Get the form on IRS.gov or by calling 800-TAX-FORM (800-829-3676).
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Page Last Reviewed or Updated: 06-Feb-2014
2012taxes Publication 597 - Main Content Table of Contents Application of Treaty Personal Services Pensions, Annuities, Social Security, and AlimonyRoth IRAs. 2012taxes Tax-deferred plans. 2012taxes Investment Income From Canadian Sources Other Income Charitable ContributionsQualified charities. 2012taxes Income Tax Credits Competent Authority Assistance How To Get Tax HelpText of Treaty U. 2012taxes S. 2012taxes Taxation Canadian Taxation Application of Treaty The benefits of the income tax treaty are generally provided on the basis of residence for income tax purposes. 2012taxes That is, a person who is recognized as a resident of the United States who has income from Canada, will often pay less income tax to Canada on that income than if no treaty was in effect. 2012taxes Article IV provides definitions of residents of Canada and the United States, and provides specific criteria for applying the treaty in cases where a taxpayer is considered by both countries to be a resident. 2012taxes Saving clause. 2012taxes In most instances, a treaty does not affect the right of a country to tax its own residents (including those who are U. 2012taxes S. 2012taxes citizens) or of the United States to tax its residents or citizens (including U. 2012taxes S. 2012taxes citizens who are residents of the foreign country). 2012taxes This provision is known as the “saving clause. 2012taxes ” For example, an individual who is a U. 2012taxes S. 2012taxes citizen and a resident of Canada may have dividend income from a U. 2012taxes S. 2012taxes corporation. 2012taxes The treaty provides a maximum rate of 15% on dividends received by a resident of Canada from sources in the United States. 2012taxes Even though a resident of Canada, the individual is a U. 2012taxes S. 2012taxes citizen and the saving clause overrides the treaty article that limits the U. 2012taxes S. 2012taxes tax to 15%. 2012taxes Exceptions to the saving clause can be found in Article XXIX, paragraph 3. 2012taxes Treaty-based position. 2012taxes If you take the position that any U. 2012taxes S. 2012taxes tax is overruled or otherwise reduced by a U. 2012taxes S. 2012taxes treaty (a treaty-based position), you generally must disclose that position on Form 8833, Treaty-Based Return Position Disclosure Under Section 6114 or 7701(b), and attach it to your return. 2012taxes Personal Services A U. 2012taxes S. 2012taxes citizen or resident who is temporarily present in Canada during the tax year is exempt from Canadian income taxes on pay for services performed, or remittances received from the United States, if the citizen or resident qualifies under one of the treaty exemption provisions set out below. 2012taxes Income from employment (Article XV). 2012taxes Income U. 2012taxes S. 2012taxes residents receive for the performance of dependent personal services in Canada (except as public entertainers) is exempt from Canadian tax if it is not more than $10,000 in Canadian currency for the year. 2012taxes If it is more than $10,000 for the year, it is exempt only if: The residents are present in Canada for no more than 183 days in any 12-month period beginning or ending in the year concerned, and The income is not paid by, or on behalf of, a Canadian resident and is not borne by a permanent establishment in Canada. 2012taxes Whether there is a permanent establishment in Canada is determined by the rules set forth in Article V. 2012taxes Example. 2012taxes You are a U. 2012taxes S. 2012taxes resident employed under an 8-month contract with a Canadian firm to install equipment in their Montreal plant. 2012taxes During the calendar year you were physically present in Canada for 179 days and were paid $16,500 (Canadian) for your services. 2012taxes Although you were in Canada for not more than 183 days during the year, your income is not exempt from Canadian income tax because it was paid by a Canadian resident and was more than $10,000 (Canadian) for the year. 2012taxes Pay received by a U. 2012taxes S. 2012taxes resident for work regularly done in more than one country as an employee on a ship, aircraft, motor vehicle, or train operated by a U. 2012taxes S. 2012taxes resident is exempt from Canadian tax. 2012taxes Income from self-employment (Article VII). 2012taxes Income from services performed (other than those performed as an employee) are taxed in Canada if they are attributable to a permanent establishment in Canada. 2012taxes This income is treated as business profits, and deductions similar to those allowed under U. 2012taxes S. 2012taxes law are allowable. 2012taxes If you carry on (or have carried on) business in both Canada and the United States, the business profits are attributable to each country based on the profits that the permanent establishment might be expected to make if it were a distinct and separate person engaged in the same or similar activities. 2012taxes The business profits attributable to the permanent establishment include only those profits derived from assets used, risks assumed, and activities performed by the permanent establishment. 2012taxes You may be considered to have a permanent establishment if you meet certain conditions. 2012taxes For more information, see Article V (Permanent Establishment) and Article VII (Business Profits). 2012taxes Public entertainers (Article XVI). 2012taxes The provisions under income from employment or income from self-employment do not apply to public entertainers (such as theater, motion picture, radio, or television artistes, musicians, or athletes) from the United States who receive more than $15,000 in gross receipts in Canadian currency, including reimbursed expenses, from their entertainment activities in Canada during the calendar year. 2012taxes However, this provision for public entertainers does not apply (and the other provisions will apply) to athletes participating in team sports in leagues with regularly scheduled games in both the United States and Canada. 2012taxes Compensation paid by the U. 2012taxes S. 2012taxes Government (Article XIX). 2012taxes Wages, salaries, and similar income (other than pensions) paid to a U. 2012taxes S. 2012taxes citizen by the United States or any of its agencies, instrumentalities, or political subdivisions for discharging governmental functions are exempt from Canadian income tax. 2012taxes The exemption does not apply to pay for services performed in connection with any trade or business carried on for profit by the United States, or any of its agencies, instrumentalities, or political subdivisions. 2012taxes Students and apprentices (Article XX). 2012taxes A full-time student, apprentice, or business trainee who is in Canada to study or acquire business experience is exempt from Canadian income tax on remittances received from any source outside Canada for maintenance, education, or training. 2012taxes The recipient must be or must have been a U. 2012taxes S. 2012taxes resident immediately before visiting Canada. 2012taxes An apprentice or business trainee can claim this exemption only for a period of one year from the date the individual first arrived in Canada for the purpose of training. 2012taxes Pensions, Annuities, Social Security, and Alimony Under Article XVIII, pensions and annuities from Canadian sources paid to U. 2012taxes S. 2012taxes residents are subject to tax by Canada, but the tax is limited to 15% of the gross amount (if a periodic pension payment) or of the taxable amount (if an annuity). 2012taxes Canadian pensions and annuities paid to U. 2012taxes S. 2012taxes residents may be taxed by the United States, but the amount of any pension included in income for U. 2012taxes S. 2012taxes tax purposes may not be more than the amount that would be included in income in Canada if the recipient were a Canadian resident. 2012taxes Pensions. 2012taxes A pension includes any payment under a pension or other retirement arrangement, Armed Forces retirement pay, war veterans pensions and allowances, and payments under a sickness, accident, or disability plan. 2012taxes It includes pensions paid by private employers and the government for services rendered. 2012taxes Pensions also include payments from individual retirement arrangements (IRAs) in the United States, registered retirement savings plans (RRSPs) and registered retirement income funds (RRIFs) in Canada. 2012taxes Pensions do not include social security benefits. 2012taxes Roth IRAs. 2012taxes A distribution from a Roth IRA is exempt from Canadian tax to the extent it would be exempt from U. 2012taxes S. 2012taxes tax if paid to a U. 2012taxes S. 2012taxes resident. 2012taxes In addition, you may elect to defer any tax in Canada on income accrued within the Roth IRA but not distributed by the Roth IRA. 2012taxes However, you cannot defer tax on any accruals due to contributions made after you become a Canadian resident. 2012taxes Tax-deferred plans. 2012taxes Generally, income that accrues in a Canadian RRSP or RRIF is subject to U. 2012taxes S. 2012taxes tax, even if it is not distributed. 2012taxes However, a U. 2012taxes S. 2012taxes citizen or resident can elect to defer U. 2012taxes S. 2012taxes tax on income from the plan until the income is distributed. 2012taxes Form 8891 is used to make the election. 2012taxes Annuities. 2012taxes An annuity is a stated sum payable periodically at stated times, during life, or during a specified number of years, under an obligation to make the payments in return for adequate and full consideration (other than services rendered). 2012taxes Annuities do not include: Non-periodic payments, or An annuity the cost of which was deductible for tax purposes. 2012taxes Special rules. 2012taxes Special rules apply to pensions and annuities with respect to: Short-term assignments, Cross-border commuters, and Individuals who participate in a Canadian qualifying plan. 2012taxes Generally, distributions in such cases are deemed to be earned in the country in which the plan is established, without regard to where the services were rendered. 2012taxes Social security benefits. 2012taxes U. 2012taxes S. 2012taxes social security benefits paid to a resident of Canada are taxed in Canada as if they were benefits under the Canada Pension Plan, except that 15% of the amount of the benefit is exempt from Canadian tax. 2012taxes Alimony. 2012taxes Alimony and similar amounts (including child support payments) from Canadian sources paid to U. 2012taxes S. 2012taxes residents are exempt from Canadian tax. 2012taxes For purposes of U. 2012taxes S. 2012taxes tax, these amounts are excluded from income to the same extent they would be excluded from income in Canada if the recipient was a Canadian resident. 2012taxes Investment Income From Canadian Sources The treaty provides beneficial treatment for certain items of Canadian source income that result from an investment of capital. 2012taxes Dividends (Article X). 2012taxes For Canadian source dividends received by U. 2012taxes S. 2012taxes residents, the Canadian income tax generally may not be more than 15%. 2012taxes A 5% rate applies to intercorporate dividends paid from a subsidiary to a parent corporation owning at least 10% of the subsidiary's voting stock. 2012taxes However, a 10% rate applies if the payer of the dividend is a nonresident-owned Canadian investment corporation. 2012taxes These rates do not apply if the owner of the dividends carries on, or has carried on, a business in Canada through a permanent establishment and the holding on which the income is paid is effectively connected with that permanent establishment. 2012taxes Interest (Article XI). 2012taxes Generally, Canadian source interest received by U. 2012taxes S. 2012taxes residents is exempt from Canadian income tax. 2012taxes The exemption does not apply if the owner of the interest carries on, or has carried on, a business in Canada through a permanent establishment and the debt on which the income is paid is effectively connected with that permanent establishment. 2012taxes Gains from the sale of property (Article XIII). 2012taxes Generally, gains from the sale of personal property by a U. 2012taxes S. 2012taxes resident having no permanent establishment in Canada are exempt from Canadian income tax. 2012taxes However, the exemption from Canadian tax does not apply to gains realized by U. 2012taxes S. 2012taxes residents on Canadian real property, and on personal property belonging to a permanent establishment in Canada. 2012taxes If the property subject to Canadian tax is a capital asset and was owned by the U. 2012taxes S. 2012taxes resident on September 26, 1980, not as part of the business property of a permanent establishment in Canada, generally the taxable gain is limited to the appreciation after 1984. 2012taxes Royalties (Article XII). 2012taxes The following are exempt from Canadian tax: Copyright royalties and other like payments for the production or reproduction of any literary, dramatic, musical, or artistic work (other than payments for motion pictures and works on film, videotape, or other means of reproduction for use in connection with television, which may be taxed at 10%), Payments for the use of, or the right to use, computer software, Payments for the use of, or the right to use, any patent or any information concerning industrial, commercial, or scientific experience (but not within a rental or franchise agreement), and Payments for broadcasting as agreed to in an exchange of notes between the countries. 2012taxes This rate or exemption does not apply if the owner of the royalties carries on, or has carried on, a business in Canada through a permanent establishment and the right or property on which the income is paid is effectively connected with that permanent establishment. 2012taxes This exemption (or lower rate) does not apply to royalties to explore for or to exploit mineral deposits, timber, and other natural resources. 2012taxes Other Income Generally, Canadian source income that is not specifically mentioned in the treaty, may be taxed by Canada. 2012taxes Gambling losses. 2012taxes Canadian residents may deduct gambling losses in the U. 2012taxes S. 2012taxes against gambling winnings in the U. 2012taxes S. 2012taxes in the same manner as a U. 2012taxes S. 2012taxes resident. 2012taxes Charitable Contributions United States income tax return. 2012taxes Under Article XXI, you may deduct contributions to certain qualified Canadian charitable organizations on your United States income tax return. 2012taxes Besides being subject to the overall limits applicable to all your charitable contributions under U. 2012taxes S. 2012taxes tax law, your charitable contributions to Canadian organizations (other than contributions to a college or university at which you or a member of your family is or was enrolled) are subject to the U. 2012taxes S. 2012taxes percentage limits on charitable contributions, applied to your Canadian source income. 2012taxes If your return does not include gross income from Canadian sources, charitable contributions to Canadian organizations are generally not deductible. 2012taxes Example. 2012taxes You are a U. 2012taxes S. 2012taxes citizen living in Canada. 2012taxes You have both U. 2012taxes S. 2012taxes and Canadian source income. 2012taxes During your tax year, you contribute to Canadian organizations that would qualify as charitable organizations under U. 2012taxes S. 2012taxes tax law if they were U. 2012taxes S. 2012taxes organizations. 2012taxes To figure the maximum amount of the contribution to Canadian organizations that you can deduct on your U. 2012taxes S. 2012taxes income tax return, multiply your adjusted gross income from Canadian sources by the percentage limit that applies to contributions under U. 2012taxes S. 2012taxes income tax law. 2012taxes Then include this amount on your return along with all your domestic charitable contributions, subject to the appropriate percentage limit required for contributions under U. 2012taxes S. 2012taxes income tax law. 2012taxes The appropriate percentage limit for U. 2012taxes S. 2012taxes tax purposes is applied to your total adjusted gross income from all sources. 2012taxes Qualified charities. 2012taxes These Canadian organizations must meet the qualifications that a U. 2012taxes S. 2012taxes charitable organization must meet under U. 2012taxes S. 2012taxes tax law. 2012taxes Usually an organization will notify you if it qualifies. 2012taxes For further information on charitable contributions and the U. 2012taxes S. 2012taxes percentage limits, see Publication 526, Charitable Contributions. 2012taxes Canadian income tax return. 2012taxes Under certain conditions, contributions to qualified U. 2012taxes S. 2012taxes charitable organizations may also be claimed on your Canadian income tax return if you are a Canadian resident. 2012taxes Income Tax Credits The treaty contains a credit provision (Article XXIV) for the elimination of double taxation. 2012taxes In general, the United States and Canada both allow a credit against their income tax for the income tax paid to the other country on income from sources in that other country. 2012taxes For detailed discussions of the U. 2012taxes S. 2012taxes income tax treatment of tax paid to foreign countries, see Publication 514, Foreign Tax Credit for Individuals. 2012taxes See paragraphs (4) and (5) of Article XXIV for certain provisions that affect the computation of the credit allowed by the United States for Canadian income taxes paid by U. 2012taxes S. 2012taxes citizens residing in Canada. 2012taxes Competent Authority Assistance Under Article XXVI, a U. 2012taxes S. 2012taxes citizen or resident may request assistance from the U. 2012taxes S. 2012taxes competent authority when the actions of Canada, the United States, or both, potentially result in double taxation or taxation contrary to the treaty. 2012taxes The U. 2012taxes S. 2012taxes competent authority may then consult with the Canadian competent authority to determine if the double taxation or denial of treaty benefits in question can be avoided. 2012taxes If the competent authorities are not able to reach agreement in a case, binding arbitration proceedings may apply. 2012taxes It is important that your request for competent authority assistance be made as soon as you have been notified by either Canada or the United States of proposed adjustments that would result in denial of treaty benefits or in double taxation. 2012taxes This is so that implementation of any agreement reached by the competent authorities is not barred by administrative, legal, or procedural barriers. 2012taxes For information that you should include with your request for competent authority assistance, see Revenue Procedure 2006-54, 2006-49 IRB 1035, available at www. 2012taxes irs. 2012taxes gov/irb/2006-49_IRB/ar13. 2012taxes html. 2012taxes The request should be addressed to: Deputy Commissioner (International) Large Business and International Division Attn: Office of Tax Treaty Internal Revenue Service 1111 Constitution Ave. 2012taxes , NW Routing: MA3-322A Washington, D. 2012taxes C. 2012taxes 20024 In addition to a timely request for assistance, you should take the following measures: File a timely protective claim for credit or refund of U. 2012taxes S. 2012taxes taxes on Form 1040X, Form 1120X, or amended Form 1041, whichever is appropriate. 2012taxes This will, among other things, give you the benefit of a foreign tax credit in case you do not qualify for the treaty benefit in question. 2012taxes For figuring this credit, attach either Form 1116, Foreign Tax Credit (Individual, Estate, or Trust), or Form 1118, Foreign Tax Credit — Corporations, as appropriate. 2012taxes Attach your protective claim to your request for competent authority assistance. 2012taxes Take appropriate action under Canadian procedures to avoid the lapse or termination of your right of appeal under Canadian income tax law. 2012taxes How To Get Tax Help You can get help with unresolved tax issues, order free publications and forms, ask tax questions, and get information from the IRS and the Canada Revenue Agency in several ways. 2012taxes Text of Treaty You can get the text of the U. 2012taxes S. 2012taxes —Canada income tax treaty from: Superintendent of Documents U. 2012taxes S. 2012taxes Government Printing Office P. 2012taxes O. 2012taxes Box 371954 Pittsburgh, PA 15250-7954 The treaty can also be found on the Internet at IRS. 2012taxes gov. 2012taxes U. 2012taxes S. 2012taxes Taxation During the filing season, the IRS conducts a taxpayer assistance program in Canada. 2012taxes To find out if IRS personnel will be in your area, you should contact the consular office at the nearest U. 2012taxes S. 2012taxes Embassy or consulate. 2012taxes Mail. 2012taxes For answers to technical or account questions, you can write to: Internal Revenue Service International Section Philadelphia, PA 19255-0525 Phone. 2012taxes You can call the IRS for help at (267) 941-1000 (not a toll-free call). 2012taxes Canadian Taxation You can get information on Canadian taxation from the Canada Revenue Agency. 2012taxes The International Tax Services Office can be contacted on 1-800-267-5177 (from anywhere in Canada and the U. 2012taxes S. 2012taxes ) or on the Internet at www. 2012taxes cra-arc. 2012taxes gc. 2012taxes ca. 2012taxes Prev Up Next Home More Online Publications