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Cheap tax software Publication 1212 - Main Content Table of Contents Definitions Debt Instruments on the OID List Debt Instruments Not on the OID List Information for Brokers and Other MiddlemenShort-Term Obligations Redeemed at Maturity Long-Term Debt Instruments Certificates of Deposit Bearer Bonds and Coupons Backup Withholding Information for Owners of OID Debt InstrumentsExceptions. Cheap tax software Adjustment for premium. Cheap tax software Adjustment for acquisition premium. Cheap tax software Adjustment for market discount. Cheap tax software Form 1099-OID How To Report OID Figuring OID on Long-Term Debt Instruments Figuring OID on Stripped Bonds and Coupons How To Get Tax HelpLow Income Taxpayer Clinics Definitions The following terms are used throughout this publication. Cheap tax software “Original issue discount” is defined first. Cheap tax software The other terms are listed alphabetically. Cheap tax software Original issue discount (OID). Cheap tax software   OID is a form of interest. Cheap tax software It is the excess of a debt instrument's stated redemption price at maturity over its issue price (acquisition price for a stripped bond or coupon). Cheap tax software Zero coupon bonds and debt instruments that pay no stated interest until maturity are examples of debt instruments that have OID. Cheap tax software Accrual period. Cheap tax software   An accrual period is an interval of time used to measure OID. Cheap tax software The length of an accrual period can be 6 months, a year, or some other period, depending on when the debt instrument was issued. Cheap tax software Acquisition premium. Cheap tax software   Acquisition premium is the excess of a debt instrument's adjusted basis immediately after purchase, including purchase at original issue, over the debt instrument's adjusted issue price at that time. Cheap tax software A debt instrument does not have acquisition premium, however, if the debt instrument was purchased at a premium. Cheap tax software See Premium, later. Cheap tax software Adjusted issue price. Cheap tax software   The adjusted issue price of a debt instrument at the beginning of an accrual period is used to figure the OID allocable to that period. Cheap tax software In general, the adjusted issue price at the beginning of the debt instrument's first accrual period is its issue price. Cheap tax software The adjusted issue price at the beginning of any subsequent accrual period is the sum of the issue price and all the OID includible in income before that accrual period minus any payment previously made on the debt instrument, other than a payment of qualified stated interest. Cheap tax software Debt instrument. Cheap tax software   The term “debt instrument” means any instrument or contractual arrangement that constitutes indebtedness under general principles of federal income tax law (including, for example, a bond, debenture, note, certificate, or other evidence of indebtedness). Cheap tax software It generally does not include an annuity contract. Cheap tax software Issue price. Cheap tax software   For debt instruments listed in Section I-A and Section I-B, the issue price generally is the initial offering price to the public (excluding bond houses and brokers) at which a substantial amount of these instruments was sold. Cheap tax software Market discount. Cheap tax software   Market discount arises when a debt instrument purchased in the secondary market has decreased in value since its issue date, generally because of an increase in interest rates. Cheap tax software An OID debt instrument has market discount if your adjusted basis in the debt instrument immediately after you acquired it (usually its purchase price) was less than the debt instrument's issue price plus the total OID that accrued before you acquired it. Cheap tax software The market discount is the difference between the issue price plus accrued OID and your adjusted basis. Cheap tax software Premium. Cheap tax software   A debt instrument is purchased at a premium if its adjusted basis immediately after purchase is greater than the total of all amounts payable on the debt instrument after the purchase date, other than qualified stated interest. Cheap tax software The premium is the excess of the adjusted basis over the payable amounts. Cheap tax software See Publication 550 for information on the tax treatment of bond premium. Cheap tax software Qualified stated interest. Cheap tax software   In general, qualified stated interest is stated interest that is unconditionally payable in cash or property (other than debt instruments of the issuer) at least annually over the term of the debt instrument at a single fixed rate. Cheap tax software Stated redemption price at maturity. Cheap tax software   A debt instrument's stated redemption price at maturity is the sum of all amounts (principal and interest) payable on the debt instrument other than qualified stated interest. Cheap tax software Yield to maturity (YTM). Cheap tax software   In general, the YTM is the discount rate that, when used in figuring the present value of all principal and interest payments, produces an amount equal to the issue price of the debt instrument. Cheap tax software The YTM is generally shown on the face of the debt instrument or in the literature you receive from your broker. Cheap tax software If you do not have this information, consult your broker, tax advisor, or the issuer. Cheap tax software Debt Instruments on the OID List The OID list on the IRS website can be used by brokers and other middlemen to prepare information returns. Cheap tax software If you own a listed debt instrument, you generally should not rely on the information in the OID list to determine (or compare) the OID to be reported on your tax return. Cheap tax software The OID amounts listed are figured without reference to the price or date at which you acquired the debt instrument. Cheap tax software For information about determining the OID to be reported on your tax return, see the instructions for figuring OID under Information for Owners of OID Debt Instruments, later. Cheap tax software The following discussions explain what information is contained in each section of the list. Cheap tax software Section I. Cheap tax software   This section contains publicly offered, long-term debt instruments. Cheap tax software Section I-A: Corporate Debt Instruments Issued Before 1985. Cheap tax software Section I-B: Corporate Debt Instruments Issued After 1984. Cheap tax software Section I-C: Inflation-Indexed Debt Instruments. Cheap tax software For each publicly offered debt instrument in Section I, the list contains the following information. Cheap tax software The name of the issuer. Cheap tax software The Committee on Uniform Security Identification Procedures (CUSIP) number. Cheap tax software The issue date. Cheap tax software The maturity date. Cheap tax software The issue price expressed as a percent of principal or of stated redemption price at maturity. Cheap tax software The annual stated or coupon interest rate. Cheap tax software (This rate is shown as 0. Cheap tax software 00 if no annual interest payments are provided. Cheap tax software ) The yield to maturity will be added to Section I-B for bonds issued after December 31, 2006. Cheap tax software The total OID accrued up to January 1 of a calendar year. Cheap tax software (This information is not available for every instrument. Cheap tax software ) For long-term debt instruments issued after July 1, 1982, the daily OID for the accrual periods falling in a calendar year and a subsequent year. Cheap tax software The total OID per $1,000 of principal or maturity value for a calendar year and a subsequent year. Cheap tax software Section II. Cheap tax software   This section contains stripped coupons and principal components of U. Cheap tax software S. Cheap tax software Treasury and Government-Sponsored Enterprise debt instruments. Cheap tax software These stripped components are available through the Department of the Treasury's Separate Trading of Registered Interest and Principal of Securities (STRIPS) program and government-sponsored enterprises such as the Resolution Funding Corporation. Cheap tax software This section also includes debt instruments backed by U. Cheap tax software S. Cheap tax software Treasury securities that represent ownership interests in those securities. Cheap tax software   The obligations listed in Section II are arranged by maturity date. Cheap tax software The amounts listed are the total OID for a calendar year per $1,000 of redemption price. Cheap tax software Section III. Cheap tax software   This section contains short-term discount obligations. Cheap tax software Section III-A: Short-Term U. Cheap tax software S. Cheap tax software Treasury Bills. Cheap tax software Section III-B: Federal Home Loan Banks. Cheap tax software Section III-C: Federal National Mortgage Association. Cheap tax software Section III-D: Federal Farm Credit Banks. Cheap tax software Section III-E: Federal Home Loan Mortgage Corporation. Cheap tax software Section III-F: Federal Agricultural Mortgage Corporation. Cheap tax software    Information that supplements Section III-A is available on the Internet at http://www. Cheap tax software treasurydirect. Cheap tax software gov/tdhome. Cheap tax software htm. Cheap tax software   The short-term obligations listed in this section are arranged by maturity date. Cheap tax software For each obligation, the list contains the CUSIP number, maturity date, issue date, issue price (expressed as a percent of principal), and discount to be reported as interest for a calendar year per $1,000 of redemption price. Cheap tax software Brokers and other middlemen should rely on the issue price information in Section III only if they are unable to determine the price actually paid by the owner. Cheap tax software Debt Instruments Not on the OID List The list of debt instruments discussed earlier does not contain the following items. Cheap tax software U. Cheap tax software S. Cheap tax software savings bonds. Cheap tax software Certificates of deposit and other face-amount certificates issued at a discount, including syndicated certificates of deposit. Cheap tax software Obligations issued by tax-exempt organizations. Cheap tax software OID debt instruments that matured or were entirely called by the issuer before the tables were posted on the IRS website. Cheap tax software Mortgage-backed securities and mortgage participation certificates. Cheap tax software Long-term OID debt instruments issued before May 28, 1969. Cheap tax software Short-term obligations, other than the obligations listed in Section III. Cheap tax software Debt instruments issued at a discount by states or their political subdivisions. Cheap tax software REMIC regular interests and CDOs. Cheap tax software Commercial paper and banker's acceptances issued at a discount. Cheap tax software Obligations issued at a discount by individuals. Cheap tax software Foreign obligations not traded in the United States and obligations not issued in the United States. Cheap tax software Information for Brokers and Other Middlemen The following discussions contain specific instructions for brokers and middlemen who hold or redeem a debt instrument for the owner. Cheap tax software In general, you must file a Form 1099 for the debt instrument if the interest or OID to be included in the owner's income for a calendar year totals $10 or more. Cheap tax software You also must file a Form 1099 if you were required to deduct and withhold tax, even if the interest or OID is less than $10. Cheap tax software See Backup Withholding, later. Cheap tax software If you must file a Form 1099, furnish a copy to the owner of the debt instrument by January 31 in the year it is due. Cheap tax software File all your Forms 1099 with the IRS, accompanied by Form 1096, by February 28 in the year it is due (March 31 if you file electronically). Cheap tax software Electronic payee statements. Cheap tax software   You can issue Form 1099-OID electronically with the consent of the recipient. Cheap tax software More information. Cheap tax software   For more information, including penalties for failure to file (or furnish) required information returns or statements, see the General Instructions for Certain Information Returns (Forms 1098, 1099, 3921, 3922, 5498, and W-2G) for the appropriate calendar year. Cheap tax software Short-Term Obligations Redeemed at Maturity If you redeem a short-term discount obligation for the owner at maturity, you must report the discount as interest on Form 1099-INT. Cheap tax software To figure the discount, use the purchase price shown on the owner's copy of the purchase confirmation receipt or similar record, or the price shown in your transaction records. Cheap tax software If you sell the obligation for the owner before maturity, you must file Form 1099-B to reflect the gross proceeds to the seller. Cheap tax software Do not report the accrued discount to the date of sale on either Form 1099-INT or Form 1099-OID. Cheap tax software If the owner's purchase price cannot be determined, figure the discount as if the owner had purchased the obligation at its original issue price. Cheap tax software A special rule is used to determine the original issue price for information reporting on U. Cheap tax software S. Cheap tax software Treasury bills (T-bills) listed in Section III-A. Cheap tax software Under this rule, you treat as the original issue price of the T-bill the noncompetitive (weighted average of accepted auction bids) discount price for the longest-maturity T-bill maturing on the same date as the T-bill being redeemed. Cheap tax software This noncompetitive discount price is the issue price (expressed as a percent of principal) shown in Section III-A. Cheap tax software A similar rule is used to figure the discount on short-term discount obligations issued by the organizations listed in Section III-B through Section III-F. Cheap tax software Example 1. Cheap tax software There are 13-week and 26-week T-bills maturing on the same date as the T-bill being redeemed. Cheap tax software The price actually paid by the owner cannot be established by owner or middleman records. Cheap tax software You treat as the issue price of the T-bill the noncompetitive discount price (expressed as a percent of principal) shown in Section III-A for a 26-week bill maturing on the same date as the T-bill redeemed. Cheap tax software The interest you report on Form 1099-INT is the OID (per $1,000 of principal) shown in Section III-A for that obligation. Cheap tax software Long-Term Debt Instruments If you hold a long-term OID debt instrument as a nominee for the true owner, you generally must file Form 1099-OID. Cheap tax software For this purpose, you can rely on Section I of the OID list to determine the following information. Cheap tax software Whether a debt instrument has OID. Cheap tax software The OID to be reported on the Form 1099-OID. Cheap tax software In general, you must report OID on publicly offered, long-term debt instruments listed in Section I. Cheap tax software You also can report OID on other long-term debt instruments. Cheap tax software Form 1099-OID. Cheap tax software   On Form 1099-OID for a calendar year show the following information. Cheap tax software Box 1. Cheap tax software The OID for the actual dates the owner held the debt instruments during a calendar year. Cheap tax software To determine this amount, see Figuring OID, next. Cheap tax software Box 2. Cheap tax software The qualified stated interest paid or credited during the calendar year. Cheap tax software Interest reported here is not reported on Form 1099-INT. Cheap tax software The qualified stated interest on Treasury inflation-protected securities may be reported on Form 1099-INT in box 3 instead. Cheap tax software Box 3. Cheap tax software Any interest or principal forfeited because of an early withdrawal that the owner can deduct from gross income. Cheap tax software Do not reduce the amounts in boxes 1 and 2 by the forfeiture. Cheap tax software Box 4. Cheap tax software Any backup withholding for this debt instrument. Cheap tax software Box 7. Cheap tax software The CUSIP number, if any. Cheap tax software If there is no CUSIP number, give a description of the debt instrument, including the abbreviation for the stock exchange, the abbreviation used by the stock exchange for the issuer, the coupon rate, and the year of maturity (for example, NYSE XYZ 12. Cheap tax software 50 2006). Cheap tax software If the issuer of the debt instrument is other than the payer, show the name of the issuer in this box. Cheap tax software Box 8. Cheap tax software The OID on a U. Cheap tax software S. Cheap tax software Treasury obligation for the part of the year the owner held the debt instrument. Cheap tax software Box 9. Cheap tax software Investment expenses passed on to holders of a single-class REMIC. Cheap tax software Boxes 10-12. Cheap tax software Use to report any state income tax withheld for this debt instrument. Cheap tax software Figuring OID. Cheap tax software   You can determine the OID on a long-term debt instrument by using either of the following. Cheap tax software Section I of the OID list. Cheap tax software The income tax regulations. Cheap tax software Using Section I. Cheap tax software   If the owner held the debt instrument for the entire calendar year, report the OID shown in Section I for the calendar year. Cheap tax software Because OID is listed for each $1,000 of stated redemption price at maturity, you must adjust the listed amount to reflect the debt instrument's actual stated redemption price at maturity. Cheap tax software For example, if the debt instrument's stated redemption price at maturity is $500, report one-half the listed OID. Cheap tax software   If the owner held the debt instrument for less than the entire calendar year, figure the OID to report as follows. Cheap tax software Look up the daily OID for the first accrual period in the calendar year during which the owner held the debt instrument. Cheap tax software Multiply the daily OID by the number of days the owner held the debt instrument during that accrual period. Cheap tax software Repeat steps (1) and (2) for any remaining accrual periods for the year during which the owner held the debt instrument. Cheap tax software Add the results in steps (2) and (3) to determine the owner's OID per $1,000 of stated redemption price at maturity. Cheap tax software If necessary, adjust the OID in (4) to reflect the debt instrument's stated redemption price at maturity. Cheap tax software Report the result on Form 1099-OID in box 1. Cheap tax software Using the income tax regulations. Cheap tax software   Instead of using Section I to figure OID, you can use the regulations under sections 1272 through 1275 of the Internal Revenue Code. Cheap tax software For example, under the regulations, you can use monthly accrual periods in figuring OID for a debt instrument issued after April 3, 1994, that provides for monthly payments. Cheap tax software (If you use Section I-B, the OID is figured using 6-month accrual periods. Cheap tax software )   For a general explanation of the rules for figuring OID under the regulations, see Figuring OID on Long-Term Debt Instruments under Information for Owners of OID Debt Instruments, later. Cheap tax software Certificates of Deposit If you hold a bank certificate of deposit (CD) as a nominee, you must determine whether the CD has OID and any OID includible in the income of the owner. Cheap tax software You must file an information return showing the reportable interest and OID, if any, on the CD. Cheap tax software These rules apply whether or not you sold the CD to the owner. Cheap tax software Report OID on a CD in the same way as OID on other debt instruments. Cheap tax software See Short-Term Obligations Redeemed at Maturity and Long-Term Debt Instruments, earlier. Cheap tax software Bearer Bonds and Coupons If a coupon from a bearer bond is presented to you for collection before the bond matures, you generally must report the interest on Form 1099-INT. Cheap tax software However, do not report the interest if either of the following apply. Cheap tax software You hold the bond as a nominee for the true owner. Cheap tax software The payee is a foreign person. Cheap tax software See Payments to foreign person under Backup Withholding, later. Cheap tax software Because you cannot assume the presenter of the coupon also owns the bond, you should not report OID on the bond on Form 1099-OID. Cheap tax software The coupon may have been “stripped” (separated) from the bond and separately purchased. Cheap tax software However, if a long-term bearer bond on the OID list is presented to you for redemption upon call or maturity, you should prepare a Form 1099-OID showing the OID for that calendar year, as well as any coupon interest payments collected at the time of redemption. Cheap tax software Backup Withholding If you report OID on Form 1099-OID or interest on Form 1099-INT for a calendar year, you may be required to apply backup withholding to the reportable payment at a rate of 28%. Cheap tax software The backup withholding is deducted at the time a cash payment is made. Cheap tax software See Pub. Cheap tax software 1281, Backup Withholding for Missing and Incorrect Name/TIN(s), for more information. Cheap tax software Backup withholding generally applies in the following situations. Cheap tax software The payee does not give you a taxpayer identification number (TIN). Cheap tax software The IRS notifies you that the payee gave an incorrect TIN. Cheap tax software The IRS notifies you that the payee is subject to backup withholding due to payee underreporting. Cheap tax software For debt instruments acquired after 1983: The payee does not certify, under penalties of perjury, that he or she is not subject to backup withholding under (3), or The payee does not certify, under penalties of perjury, that the TIN given is correct. Cheap tax software However, for short-term discount obligations (other than government obligations), bearer bonds and coupons, and U. Cheap tax software S. Cheap tax software savings bonds, backup withholding applies only if the payee does not give you a TIN or gives you an obviously incorrect number for a TIN. Cheap tax software Short-term obligations. Cheap tax software   Backup withholding applies to OID on a short-term obligation only when the OID is paid at maturity. Cheap tax software However, backup withholding applies to any interest payable before maturity when the interest is paid or credited. Cheap tax software   If the owner of a short-term obligation at maturity is not the original owner and can establish the purchase price of the obligation, the amount subject to backup withholding must be determined by treating the purchase price as the issue price. Cheap tax software However, you can choose to disregard that price if it would require significant manual intervention in the computer or recordkeeping system used for the obligation. Cheap tax software If the purchase price of a listed obligation is not established or is disregarded, you must use the issue price shown in Section III. Cheap tax software Long-term obligations. Cheap tax software   If no cash payments are made on a long-term obligation before maturity, backup withholding applies only at maturity. Cheap tax software The amount subject to backup withholding is the OID includible in the owner's gross income for the calendar year when the obligation matures. Cheap tax software The amount to be withheld is limited to the cash paid. Cheap tax software Registered long-term obligations with cash payments. Cheap tax software   If a registered long-term obligation has cash payments before maturity, backup withholding applies when a cash payment is made. Cheap tax software The amount subject to backup withholding is the total of the qualified stated interest (defined earlier under Definitions) and OID includible in the owner's gross income for the calendar year when the payment is made. Cheap tax software If more than one cash payment is made during the year, the OID subject to withholding for the year must be allocated among the expected cash payments in the ratio that each bears to the total of the expected cash payments. Cheap tax software For any payment, the required withholding is limited to the cash paid. Cheap tax software Payee not the original owner. Cheap tax software   If the payee is not the original owner of the obligation, the OID subject to backup withholding is the OID includible in the gross income of all owners during the calendar year (without regard to any amount paid by the new owner at the time of transfer). Cheap tax software The amount subject to backup withholding at maturity of a listed obligation must be determined using the issue price shown in Section I. Cheap tax software Bearer long-term obligations with cash payments. Cheap tax software   If a bearer long-term obligation has cash payments before maturity, backup withholding applies when the cash payments are made. Cheap tax software For payments before maturity, the amount subject to withholding is the qualified stated interest (defined earlier under Definitions) includible in the owner's gross income for the calendar year. Cheap tax software For a payment at maturity, the amount subject to withholding is only the total of any qualified stated interest paid at maturity and the OID includible in the owner's gross income for the calendar year when the obligation matures. Cheap tax software The required withholding at maturity is limited to the cash paid. Cheap tax software Sales and redemptions. Cheap tax software   If you report the gross proceeds from a sale, exchange, or redemption of a debt instrument on Form 1099-B for a calendar year, you may be required to withhold 28% of the amount reported. Cheap tax software Backup withholding applies in the following situations. Cheap tax software The payee does not give you a TIN. Cheap tax software The IRS notifies you that the payee gave an incorrect TIN. Cheap tax software For debt instruments held in an account opened after 1983, the payee does not certify, under penalties of perjury, that the TIN given is correct. Cheap tax software Payments outside the United States to U. Cheap tax software S. Cheap tax software person. Cheap tax software   The requirements for backup withholding and information reporting apply to payments of OID and interest made outside the United States to a U. Cheap tax software S. Cheap tax software person, a controlled foreign corporation, or a foreign person at least 50% of whose income for the preceding 3-year period is effectively connected with the conduct of a U. Cheap tax software S. Cheap tax software trade or business. Cheap tax software Payments to foreign person. Cheap tax software   The following discussions explain the rules for backup withholding and information reporting on payments to foreign persons. Cheap tax software U. Cheap tax software S. Cheap tax software -source amount. Cheap tax software   Backup withholding and information reporting are not required for payments of U. Cheap tax software S. Cheap tax software -source OID, interest, or proceeds from a sale or redemption of an OID instrument if the payee has given you proof (generally the appropriate Form W-8 or an acceptable substitute) that the payee is a foreign person. Cheap tax software A U. Cheap tax software S. Cheap tax software resident is not a foreign person. Cheap tax software For proof of the payee's foreign status, you can rely on the appropriate Form W-8 or on documentary evidence for payments made outside the United States to an offshore account or, in case of broker proceeds, a sale effected outside the United States. Cheap tax software Receipt of the appropriate Form W-8 does not relieve you from information reporting and backup withholding if you actually know the payee is a U. Cheap tax software S. Cheap tax software person. Cheap tax software   For information about the 28% withholding tax that may apply to payments of U. Cheap tax software S. Cheap tax software -source OID or interest to foreign persons, see Publication 515. Cheap tax software Foreign-source amount. Cheap tax software   Backup withholding and information reporting are not required for payments of foreign-source OID and interest made outside the United States. Cheap tax software However, if the payments are made inside the United States, the requirements for backup withholding and information reporting will apply unless the payee has given you the appropriate Form W-8 or acceptable substitute as proof that the payee is a foreign person. Cheap tax software More information. Cheap tax software   For more information about backup withholding and information reporting on foreign-source amounts or payments to foreign persons, see Regulations section 1. Cheap tax software 6049-5. Cheap tax software Information for Owners of OID Debt Instruments This section is for persons who prepare their own tax returns. Cheap tax software It discusses the income tax rules for figuring and reporting OID on long-term debt instruments. Cheap tax software It also includes a similar discussion for stripped bonds and coupons, such as zero coupon bonds available through the Department of the Treasury's STRIPS program and government-sponsored enterprises such as the Resolution Funding Corporation. Cheap tax software However, the information provided does not cover every situation. Cheap tax software More information can be found in the regulations under sections 1271 through 1275 of the Internal Revenue Code. Cheap tax software Including OID in income. Cheap tax software   Generally, you include OID in income as it accrues each year, whether or not you receive any payments from the debt instrument issuer. Cheap tax software Exceptions. Cheap tax software   The rules for including OID in income as it accrues generally do not apply to the following debt instruments. Cheap tax software U. Cheap tax software S. Cheap tax software savings bonds. Cheap tax software Tax-exempt obligations. Cheap tax software (However, see Tax-Exempt Bonds and Coupons, later. Cheap tax software ) Obligations issued by individuals before March 2, 1984. Cheap tax software Loans of $10,000 or less between individuals who are not in the business of lending money. Cheap tax software (The dollar limit includes outstanding prior loans by the lender to the borrower. Cheap tax software ) This exception does not apply if a principal purpose of the loan is to avoid any federal tax. Cheap tax software   See chapter 1 of Publication 550 for information about the rules for these and other types of discounted debt instruments, such as short-term and market discount obligations. Cheap tax software Publication 550 also discusses rules for holders of REMIC interests and CDOs. Cheap tax software De minimis rule. Cheap tax software   You can treat OID as zero if the total OID on a debt instrument is less than one-fourth of 1% (. Cheap tax software 0025) of the stated redemption price at maturity multiplied by the number of full years from the date of original issue to maturity. Cheap tax software Debt instruments with de minimis OID are not listed in this publication. Cheap tax software There are special rules to determine the de minimis amount in the case of debt instruments that provide for more than one payment of principal. Cheap tax software Also, the de minimis rules generally do not apply to tax-exempt obligations. Cheap tax software Example 2. Cheap tax software You bought at issuance a 10-year debt instrument with a stated redemption price at maturity of $1,000, issued at $980 with OID of $20. Cheap tax software One-fourth of 1% of $1,000 (the stated redemption price) times 10 (the number of full years from the date of original issue to maturity) equals $25. Cheap tax software Under the de minimis rule, you can treat the OID as zero because the $20 discount is less than $25. Cheap tax software Example 3. Cheap tax software Assume the same facts as Example 2, except the debt instrument was issued at $950. Cheap tax software You must report part of the $50 OID each year because it is more than $25. Cheap tax software Choice to report all interest as OID. Cheap tax software   Generally, you can choose to treat all interest on a debt instrument acquired after April 3, 1994, as OID and include it in gross income by using the constant yield method. Cheap tax software See Constant yield method under Debt Instruments Issued After 1984, later, for more information. Cheap tax software   For this choice, interest includes stated interest, acquisition discount, OID, de minimis OID, market discount, de minimis market discount, and unstated interest, as adjusted by any amortizable bond premium or acquisition premium. Cheap tax software For more information, see Regulations section 1. Cheap tax software 1272-3. Cheap tax software Purchase after date of original issue. Cheap tax software   A debt instrument you purchased after the date of original issue may have premium, acquisition premium, or market discount. Cheap tax software If so, the OID reported to you on Form 1099-OID may have to be adjusted. Cheap tax software For more information, see Showing an OID adjustment under How To Report OID, later. Cheap tax software The following rules generally do not apply to contingent payment debt instruments. Cheap tax software Adjustment for premium. Cheap tax software   If your debt instrument (other than an inflation-indexed debt instrument) has premium, do not report any OID as ordinary income. Cheap tax software Your adjustment is the total OID shown on your Form 1099-OID. Cheap tax software Adjustment for acquisition premium. Cheap tax software   If your debt instrument has acquisition premium, reduce the OID you report. Cheap tax software Your adjustment is the difference between the OID shown on your Form 1099-OID and the reduced OID amount figured using the rules explained later under Figuring OID on Long-Term Debt Instruments. Cheap tax software Adjustment for market discount. Cheap tax software   If your debt instrument has market discount that you choose to include in income currently, increase the OID you report. Cheap tax software Your adjustment is the accrued market discount for the year. Cheap tax software See Market Discount Bonds in chapter 1 of Publication 550 for information on how to figure accrued market discount and include it in your income currently and for other information about market discount bonds. Cheap tax software If you choose to use the constant yield method to figure accrued market discount, also see Figuring OID on Long-Term Debt Instruments, later. Cheap tax software The constant yield method of figuring accrued OID, explained in those discussions under Constant yield method, is also used to figure accrued market discount. Cheap tax software For more information concerning premium or market discount on an inflation-indexed debt instrument, see Regulations section 1. Cheap tax software 1275-7. Cheap tax software Sale, exchange, or redemption. Cheap tax software   Generally, you treat your gain or loss from the sale, exchange, or redemption of a discounted debt instrument as a capital gain or loss if you held the debt instrument as a capital asset. Cheap tax software If you sold the debt instrument through a broker, you should receive Form 1099-B or an equivalent statement from the broker. Cheap tax software Use the Form 1099-B or other statement and your brokerage statements to complete Form 8949, and Schedule D (Form 1040). Cheap tax software   Your gain or loss is the difference between the amount you realized on the sale, exchange, or redemption and your basis in the debt instrument. Cheap tax software Your basis, generally, is your cost increased by the OID you have included in income each year you held it. Cheap tax software In general, to determine your gain or loss on a tax-exempt bond, figure your basis in the bond by adding to your cost the OID you would have included in income if the bond had been taxable. Cheap tax software   See chapter 4 of Publication 550 for more information about the tax treatment of the sale or redemption of discounted debt instruments. Cheap tax software Example 4. Cheap tax software Larry, a calendar year taxpayer, bought a corporate debt instrument at original issue for $86,235. Cheap tax software 00 on November 1 of Year 1. Cheap tax software The 15-year debt instrument matures on October 31 of Year 16 at a stated redemption price of $100,000. Cheap tax software The debt instrument provides for semiannual payments of interest at 10%. Cheap tax software Assume the debt instrument is a capital asset in Larry's hands. Cheap tax software The debt instrument has $13,765. Cheap tax software 00 of OID ($100,000 stated redemption price at maturity minus $86,235. Cheap tax software 00 issue price). Cheap tax software Larry sold the debt instrument for $90,000 on November 1 of Year 4. Cheap tax software Including the OID he will report for the period he held the debt instrument in Year 4, Larry has included $4,556. Cheap tax software 00 of OID in income and has increased his basis by that amount to $90,791. Cheap tax software 00. Cheap tax software Larry has realized a loss of $791. Cheap tax software 00. Cheap tax software All of Larry's loss is capital loss. Cheap tax software Form 1099-OID The issuer of the debt instrument (or your broker, if you purchased or held the debt instrument through a broker) should give you a copy of Form 1099-OID or a similar statement if the accrued OID for the calendar year is $10 or more and the term of the debt instrument is more than 1 year. Cheap tax software Form 1099-OID shows all OID income in box 1 except OID on a U. Cheap tax software S. Cheap tax software Treasury obligation, which is shown in box 8. Cheap tax software It also shows, in box 2, any qualified stated interest you must include in income. Cheap tax software (However, any qualified stated interest on Treasury inflation-protected securities can be reported on Form 1099-INT in box 3. Cheap tax software ) A copy of Form 1099-OID will be sent to the IRS. Cheap tax software Do not attach your copy to your tax return. Cheap tax software Keep it for your records. Cheap tax software If you are required to file a tax return and you receive Form 1099-OID showing taxable amounts, you must report these amounts on your return. Cheap tax software A 20% accuracy-related penalty may be charged for underpayment of tax due to either negligence or disregard of rules and regulations or substantial understatement of tax. Cheap tax software Form 1099-OID not received. Cheap tax software   If you held an OID debt instrument for a calendar year but did not receive a Form 1099-OID, refer to the discussions under Figuring OID on Long-Term Debt Instruments, later, for information on the OID you must report. Cheap tax software Refiguring OID. Cheap tax software   You must refigure the OID shown on Form 1099-OID, in box 1 or box 8, to determine the proper amount to include in income if one of the following applies. Cheap tax software You bought the debt instrument at a premium or at an acquisition premium. Cheap tax software The debt instrument is a stripped bond or coupon (including zero coupon bonds backed by U. Cheap tax software S. Cheap tax software Treasury securities). Cheap tax software The debt instrument is a contingent payment or inflation-indexed debt instrument. Cheap tax software See the discussions under Figuring OID on Long-Term Debt Instruments or Figuring OID on Stripped Bonds and Coupons, later, for the specific computations. Cheap tax software Refiguring interest. Cheap tax software   If you disposed of a debt instrument or acquired it from another holder between interest dates, see the discussion under Bonds Sold Between Interest Dates in chapter 1 of Publication 550 for information about refiguring the interest shown on Form 1099-OID in box 2. Cheap tax software Nominee. Cheap tax software   If you are the holder of an OID debt instrument and you receive a Form 1099-OID that shows your taxpayer identification number and includes amounts belonging to another person, you are considered a “nominee. Cheap tax software ” You must file another Form 1099-OID for each actual owner, showing the OID for the owner. Cheap tax software Show the owner of the debt instrument as the “recipient” and you as the “payer. Cheap tax software ”   Complete Form 1099-OID and Form 1096 and file the forms with the Internal Revenue Service Center for your area. Cheap tax software You must also give a copy of the Form 1099-OID to the actual owner. Cheap tax software However, you are not required to file a nominee return to show amounts belonging to your spouse. Cheap tax software See the Form 1099 instructions for more information. Cheap tax software   When preparing your tax return, follow the instructions under Showing an OID adjustment in the next discussion. Cheap tax software How To Report OID Generally, you report your taxable interest and OID income on the interest line of Form 1040EZ, Form 1040A, or Form 1040. Cheap tax software Form 1040 or Form 1040A required. Cheap tax software   You must use Form 1040 or Form 1040A (you cannot use Form 1040EZ) under either of the following conditions. Cheap tax software You received a Form 1099-OID as a nominee for the actual owner. Cheap tax software Your total interest and OID income for the year was more than $1,500. Cheap tax software Form 1040 required. Cheap tax software   You must use Form 1040 (you cannot use Form 1040A or Form 1040EZ) if you are reporting more or less OID than the amount shown on Form 1099-OID, other than because you are a nominee. Cheap tax software For example, if you paid a premium or an acquisition premium when you purchased the debt instrument, you must use Form 1040 because you will report less OID than shown on Form 1099-OID. Cheap tax software Also, you must use Form 1040 if you were charged an early withdrawal penalty. Cheap tax software Where to report. Cheap tax software   List each payer's name (if a brokerage firm gave you a Form 1099, list the brokerage firm as the payer) and the amount received from each payer on Form 1040A, Schedule B, Part I, line 1, or Form 1040, Schedule B, line 1. Cheap tax software Include all OID and periodic interest shown on any Form 1099-OID, boxes 1, 2, and 8, you received for the tax year. Cheap tax software Also include any other OID and interest income for which you did not receive a Form 1099. Cheap tax software Showing an OID adjustment. Cheap tax software   If you use Form 1040 to report more or less OID than shown on Form 1099-OID, list the full OID on Schedule B, Part I, line 1, and follow the instructions under 1 or 2, next. Cheap tax software   If you use Form 1040A to report the OID shown on a Form 1099-OID you received as a nominee for the actual owner, list the full OID on Schedule B, Part I, line 1 and follow the instructions under 1. Cheap tax software If the OID, as adjusted, is less than the amount shown on Form 1099-OID, show the adjustment as follows. Cheap tax software Under your last entry on line 1, subtotal all interest and OID income listed on line 1. Cheap tax software Below the subtotal, write “Nominee Distribution” or “OID Adjustment” and show the OID you are not required to report. Cheap tax software Subtract that OID from the subtotal and enter the result on line 2. Cheap tax software If the OID, as adjusted, is more than the amount shown on Form 1099-OID, show the adjustment as follows. Cheap tax software Under your last entry on line 1, subtotal all interest and OID income listed on line 1. Cheap tax software Below the subtotal, write “OID Adjustment” and show the additional OID. Cheap tax software Add that OID to the subtotal and enter the result on line 2. Cheap tax software Figuring OID on Long-Term Debt Instruments How you figure the OID on a long-term debt instrument depends on the date it was issued. Cheap tax software It also may depend on the type of the debt instrument. Cheap tax software There are different rules for each of the following debt instruments. Cheap tax software Corporate debt instruments issued after 1954 and before May 28, 1969, and government debt instruments issued after 1954 and before July 2, 1982. Cheap tax software Corporate debt instruments issued after May 27, 1969, and before July 2, 1982. Cheap tax software Debt instruments issued after July 1, 1982, and before 1985. Cheap tax software Debt instruments issued after 1984 (other than debt instruments described in (5) and (6)). Cheap tax software Contingent payment debt instruments issued after August 12, 1996. Cheap tax software Inflation-indexed debt instruments (including Treasury inflation-protected securities) issued after January 5, 1997. Cheap tax software Zero coupon bonds. Cheap tax software   The rules for figuring OID on zero coupon bonds backed by U. Cheap tax software S. Cheap tax software Treasury securities are discussed under Figuring OID on Stripped Bonds and Coupons, later. Cheap tax software Corporate Debt Instruments Issued After 1954 and Before May 28, 1969, and Government Debt Instruments Issued After 1954 and Before July 2, 1982 If you hold these debt instruments as capital assets, you include OID in income only in the year the debt instrument is sold, exchanged, or redeemed, and only if you have a gain. Cheap tax software The OID, which is taxed as ordinary income, generally equals the following amount. Cheap tax software   number of full months you held the debt instrument  number of full months from date of original issue to date of maturity X original issue discount The balance of the gain is capital gain. Cheap tax software If there is a loss on the sale of the debt instrument, the entire loss is a capital loss and no OID is reported. Cheap tax software Corporate Debt Instruments Issued After May 27, 1969, and Before July 2, 1982 If you hold these debt instruments as capital assets, you must include part of the OID in income each year you own the debt instruments. Cheap tax software For information about showing the correct OID on your tax return, see the discussion under How To Report OID, earlier. Cheap tax software Your basis in the debt instrument is increased by the OID you include in income. Cheap tax software Form 1099-OID. Cheap tax software   You should receive a Form 1099-OID showing OID for the part of the year you held the debt instrument. Cheap tax software However, if you paid an acquisition premium, you may need to refigure the OID to report on your tax return. Cheap tax software See Reduction for acquisition premium, later. Cheap tax software If you held an OID debt instrument in a calendar year but did not receive a Form 1099-OID, see Form 1099-OID not received, immediately below, and refer to Section I-A available at www. Cheap tax software irs. Cheap tax software gov/pub1212 by clicking the link under Recent Developments. Cheap tax software Form 1099-OID not received. Cheap tax software    The OID listed is for each $1,000 of redemption price. Cheap tax software You must adjust the listed amount if your debt instrument has a different principal amount. Cheap tax software For example, if you have a debt instrument with a $500 principal amount, use one-half the listed amount to figure your OID. Cheap tax software   If you held the debt instrument the entire year, use the OID shown in Section I-A for a calendar year. Cheap tax software (If your debt instrument is not listed in Section I-A, consult the issuer for information about the issue price and the OID that accrued for that year. Cheap tax software ) If you did not hold the debt instrument the entire year, figure your OID using the following method. Cheap tax software Divide the OID shown by 12. Cheap tax software Multiply the result in (1) by the number of complete and partial months (for example, 6½ months) you held the debt instrument during a calendar year. Cheap tax software This is the OID to include in income unless you paid an acquisition premium. Cheap tax software The reduction for acquisition premium is discussed next. Cheap tax software Reduction for acquisition premium. Cheap tax software   If you bought the debt instrument at an acquisition premium, figure the OID to include in income as follows. Cheap tax software Divide the total OID on the debt instrument by the number of complete months, and any part of a month, from the date of original issue to the maturity date. Cheap tax software This is the monthly OID. Cheap tax software Subtract from your cost the issue price and the accumulated OID from the date of issue to the date of purchase. Cheap tax software (If the result is zero or less, stop here. Cheap tax software You did not pay an acquisition premium. Cheap tax software ) Divide the amount figured in (2) by the number of complete months, and any part of a month, from the date of your purchase to the maturity date. Cheap tax software Subtract the amount figured in (3) from the amount figured in (1). Cheap tax software This is the OID to include in income for each month you hold the debt instrument during the year. Cheap tax software Transfers during the month. Cheap tax software   If you buy or sell a debt instrument on any day other than the same day of the month as the date of original issue, the ratable monthly portion of OID for the month of sale is divided between the seller and the buyer according to the number of days each held the debt instrument. Cheap tax software Your holding period for this purpose begins the day you acquire the debt instrument and ends the day before you dispose of it. Cheap tax software Debt Instruments Issued After July 1, 1982, and Before 1985 If you hold these debt instruments as capital assets, you must include part of the OID in income each year you own the debt instruments and increase your basis by the amount included. Cheap tax software For information about showing the correct OID on your tax return, see How To Report OID, earlier. Cheap tax software Form 1099-OID. Cheap tax software   You should receive a Form 1099-OID showing OID for the part of the year you held the debt instrument. Cheap tax software However, if you paid an acquisition premium, you may need to refigure the OID to report on your tax return. Cheap tax software See Constant yield method and the discussions on acquisition premium that follow, later. Cheap tax software If you held an OID debt instrument in a calendar year but did not receive a Form 1099-OID, see Form 1099-OID not received, immediately below, and refer to Section I-A available at www. Cheap tax software irs. Cheap tax software gov/pub1212 by clicking the link under Recent Developments. Cheap tax software Form 1099-OID not received. Cheap tax software    The OID listed is for each $1,000 of redemption price. Cheap tax software You must adjust the listed amount if your debt instrument has a different principal amount. Cheap tax software For example, if you have a debt instrument with a $500 principal amount, use one-half the listed amount to figure your OID. Cheap tax software   If you held the debt instrument the entire year, use the OID shown in Section I-A. Cheap tax software (If your instrument is not listed in Section I-A, consult the issuer for information about the issue price, the yield to maturity, and the OID that accrued for that year. Cheap tax software ) If you did not hold the debt instrument the entire year, figure your OID using either of the following methods. Cheap tax software Method 1. Cheap tax software    Divide the total OID for a calendar year by 365 (366 for leap years). Cheap tax software Multiply the result in (1) by the number of days you held the debt instrument during that particular year. Cheap tax software  This computation is an approximation and may result in a slightly higher OID than Method 2. Cheap tax software Method 2. Cheap tax software    Look up the daily OID for the first accrual period you held the debt instrument during a calendar year. Cheap tax software (See Accrual period under Constant yield method, next. Cheap tax software ) Multiply the daily OID by the number of days you held the debt instrument during that accrual period. Cheap tax software If you held the debt instrument for part of both accrual periods, repeat (1) and (2) for the second accrual period. Cheap tax software Add the results of (2) and (3). Cheap tax software This is the OID to include in income, unless you paid an acquisition premium. Cheap tax software (The reduction for acquisition premium is discussed later. Cheap tax software ) Constant yield method. Cheap tax software   This discussion shows how to figure OID on debt instruments issued after July 1, 1982, and before 1985, using a constant yield method. Cheap tax software OID is allocated over the life of the debt instrument through adjustments to the issue price for each accrual period. Cheap tax software   Figure the OID allocable to any accrual period as follows. Cheap tax software Multiply the adjusted issue price at the beginning of the accrual period by the debt instrument's yield to maturity. Cheap tax software Subtract from the result in (1) any qualified stated interest allocable to the accrual period. Cheap tax software Accrual period. Cheap tax software   An accrual period for any OID debt instrument issued after July 1, 1982, and before 1985 is each 1-year period beginning on the date of the issue of the obligation and each anniversary thereafter, or the shorter period to maturity for the last accrual period. Cheap tax software Your tax year will usually include parts of two accrual periods. Cheap tax software Daily OID. Cheap tax software   The OID for any accrual period is allocated equally to each day in the accrual period. Cheap tax software You must include in income the sum of the OID amounts for each day you hold the debt instrument during the year. Cheap tax software If your tax year includes parts of two or more accrual periods, you must include the proper daily OID amounts for each accrual period. Cheap tax software Figuring daily OID. Cheap tax software   The daily OID for the initial accrual period is figured using the following formula. Cheap tax software   (ip × ytm) − qsi     p   ip = issue price ytm = yield to maturity qsi = qualified stated interest p = number of days in accrual period         The daily OID for subsequent accrual periods is figured the same way except the adjusted issue price at the beginning of each period is used in the formula instead of the issue price. Cheap tax software Reduction for acquisition premium on debt instruments purchased before July 19, 1984. Cheap tax software   If you bought the debt instrument at an acquisition premium before July 19, 1984, figure the OID includible in income by reducing the daily OID by the daily acquisition premium. Cheap tax software Figure the daily acquisition premium by dividing the total acquisition premium by the number of days in the period beginning on your purchase date and ending on the day before the date of maturity. Cheap tax software Reduction for acquisition premium on debt instruments purchased after July 18, 1984. Cheap tax software   If you bought the debt instrument at an acquisition premium after July 18, 1984, figure the OID includible in income by reducing the daily OID by the daily acquisition premium. Cheap tax software However, the method of figuring the daily acquisition premium is different from the method described in the preceding discussion. Cheap tax software To figure the daily acquisition premium under this method, multiply the daily OID by the following fraction. Cheap tax software The numerator is the acquisition premium. Cheap tax software The denominator is the total OID remaining for the debt instrument after your purchase date. Cheap tax software Section I-A is available at www. Cheap tax software irs. Cheap tax software gov/pub1212 and clicking the link under Recent Developments. Cheap tax software Using Section I-A to figure accumulated OID. Cheap tax software   If you bought your corporate debt instrument in a calendar year or the subsequent year, you can figure the accumulated OID to the date of purchase by adding the following amounts. Cheap tax software The amount from the “Total OID to January 1, YYYY” column for your debt instrument. Cheap tax software The OID from January 1 of a calendar year to the date of purchase, figured as follows. Cheap tax software Multiply the daily OID for the first accrual period in the calendar year by the number of days from January 1 to the date of purchase, or the end of the accrual period if the debt instrument was purchased in the second or third accrual period. Cheap tax software Multiply the daily OID for each subsequent accrual period by the number of days in the period to the date of purchase or the end of the accrual period, whichever applies. Cheap tax software Add the amounts figured in (2a) and (2b). Cheap tax software Debt Instruments Issued After 1984 If you hold debt instruments issued after 1984, you must report part of the OID in gross income each year that you own the debt instruments. Cheap tax software You must include the OID in gross income whether or not you hold the debt instrument as a capital asset. Cheap tax software Your basis in the debt instrument is increased by the OID you include in income. Cheap tax software For information about showing the correct OID on your tax return, see How To Report OID, earlier. Cheap tax software Form 1099-OID. Cheap tax software   You should receive a Form 1099-OID showing OID for the part of a calendar year you held the debt instrument. Cheap tax software However, if you paid an acquisition premium, you may need to refigure the OID to report on your tax return. Cheap tax software See Constant yield method and Reduction for acquisition premium, later. Cheap tax software   You may also need to refigure the OID for a contingent payment or inflation-indexed debt instrument on which the amount reported on Form 1099-OID is inaccurate. Cheap tax software See Contingent Payment Debt Instruments or Inflation-Indexed Debt Instruments, later. Cheap tax software If you held an OID debt instrument in a calendar year but did not receive a Form 1099-OID, see Form 1099-OID not received, immediately below, and refer to Section I-B available at www. Cheap tax software irs. Cheap tax software gov/pub1212 by clicking the link under Recent Developments. Cheap tax software Form 1099-OID not received. Cheap tax software   The OID listed is for each $1,000 of redemption price. Cheap tax software You must adjust the listed amount if your debt instrument has a different principal amount. Cheap tax software For example, if you have a debt instrument with a $500 principal amount, use one-half the listed amount to figure your OID. Cheap tax software   Use the OID shown in Section I-B for a calendar year if you held the debt instrument the entire year. Cheap tax software (If your debt instrument is not listed in Section I-B, consult the issuer for information about the issue price, the yield to maturity, and the OID that accrued for that year. Cheap tax software ) If you did not hold the debt instrument the entire year, figure your OID as follows. Cheap tax software Look up the daily OID for the first accrual period in which you held the debt instrument during a calendar year. Cheap tax software (See Accrual period under Constant yield method, later. Cheap tax software ) Multiply the daily OID by the number of days you held the debt instrument during that accrual period. Cheap tax software Repeat (1) and (2) for any remaining accrual periods in which you held the debt instrument. Cheap tax software Add the results of (2) and (3). Cheap tax software This is the OID to include in income for that year, unless you paid an acquisition premium. Cheap tax software (The reduction for acquisition premium is discussed later. Cheap tax software ) Tax-exempt bond. Cheap tax software   If you own a tax-exempt bond, figure your basis in the bond by adding to your cost the OID you would have included in income if the bond had been taxable. Cheap tax software You need to make this adjustment to determine if you have a gain or loss on a later disposition of the bond. Cheap tax software In general, use the rules that follow to determine your OID. Cheap tax software Constant yield method. Cheap tax software   This discussion shows how to figure OID on debt instruments issued after 1984 using a constant yield method. Cheap tax software (The special rules that apply to contingent payment debt instruments and inflation-indexed debt instruments are explained later. Cheap tax software ) OID is allocated over the life of the debt instrument through adjustments to the issue price for each accrual period. Cheap tax software   Figure the OID allocable to any accrual period as follows. Cheap tax software Multiply the adjusted issue price at the beginning of the accrual period by a fraction. Cheap tax software The numerator of the fraction is the debt instrument's yield to maturity and the denominator is the number of accrual periods per year. Cheap tax software The yield must be stated appropriately taking into account the length of the particular accrual period. Cheap tax software Subtract from the result in (1) any qualified stated interest allocable to the accrual period. Cheap tax software Accrual period. Cheap tax software   For debt instruments issued after 1984 and before April 4, 1994, an accrual period is each 6-month period that ends on the day that corresponds to the stated maturity date of the debt instrument or the date 6 months before that date. Cheap tax software For example, a debt instrument maturing on March 31 has accrual periods that end on September 30 and March 31 of each calendar year. Cheap tax software Any short period is included as the first accrual period. Cheap tax software   For debt instruments issued after April 3, 1994, accrual periods may be of any length and may vary in length over the term of the debt instrument, as long as each accrual period is no longer than 1 year and all payments are made on the first or last day of an accrual period. Cheap tax software However, the OID listed for these debt instruments in Section I-B has been figured using 6-month accrual periods. Cheap tax software Daily OID. Cheap tax software   The OID for any accrual period is allocated equally to each day in the accrual period. Cheap tax software Figure the amount to include in income by adding the OID for each day you hold the debt instrument during the year. Cheap tax software Since your tax year will usually include parts of two or more accrual periods, you must include the proper daily OID for each accrual period. Cheap tax software If your debt instrument has 6-month accrual periods, your tax year will usually include one full 6-month accrual period and parts of two other 6-month periods. Cheap tax software Figuring daily OID. Cheap tax software   The daily OID for the initial accrual period is figured using the following formula. Cheap tax software   (ip × ytm/n) − qsi     p   ip = issue price ytm = yield to maturity n = number of accrual periods in 1 year qsi = qualified stated interest p = number of days in accrual period       The daily OID for subsequent accrual periods is figured the same way except the adjusted issue price at the beginning of each period is used in the formula instead of the issue price. Cheap tax software Example 5. Cheap tax software On January 1 of Year 1, you bought a 15-year, 10% debt instrument of A Corporation at original issue for $86,235. Cheap tax software 17. Cheap tax software According to the prospectus, the debt instrument matures on December 31 of Year 15 at a stated redemption price of $100,000. Cheap tax software The yield to maturity is 12%, compounded semiannually. Cheap tax software The debt instrument provides for qualified stated interest payments of $5,000 on June 30 and December 31 of each calendar year. Cheap tax software The accrual periods are the 6-month periods ending on each of these dates. Cheap tax software The number of days for the first accrual period (January 1 through June 30) is 181 days (182 for leap years). Cheap tax software The daily OID for the first accrual period is figured as follows. Cheap tax software   ($86,235. Cheap tax software 17 x . Cheap tax software 12/2) – $5,000     181 days     = $174. Cheap tax software 11020 = $. Cheap tax software 96193   181           The adjusted issue price at the beginning of the second accrual period is the issue price plus the OID previously includible in income ($86,235. Cheap tax software 17 + $174. Cheap tax software 11), or $86,409. Cheap tax software 28. Cheap tax software The number of days for the second accrual period (July 1 through December 31) is 184 days. Cheap tax software The daily OID for the second accrual period is figured as follows. Cheap tax software   ($86,409. Cheap tax software 28 x . Cheap tax software 12/2) – $5,000     184 days     = $184. Cheap tax software 55681 = $1. Cheap tax software 00303   184 Since the first and second accrual periods coincide exactly with your tax year, you include in income for Year 1 the OID allocable to the first two accrual periods, $174. Cheap tax software 11 ($. Cheap tax software 95665 × 182 days) plus $184. Cheap tax software 56 ($1. Cheap tax software 00303 × 184 days), or $358. Cheap tax software 67. Cheap tax software Add the OID to the $10,000 interest you report on your income tax return for Year 1. Cheap tax software Example 6. Cheap tax software Assume the same facts as in Example 5, except that you bought the debt instrument at original issue on May 1 of Year 1, with a maturity date of April 30, Year 16. Cheap tax software Also, the interest payment dates are October 31 and April 30 of each calendar year. Cheap tax software The accrual periods are the 6-month periods ending on each of these dates. Cheap tax software The number of days for the first accrual period (May 1 through October 31) is 184 days. Cheap tax software The daily OID for the first accrual period is figured as follows. Cheap tax software   ($86,235. Cheap tax software 17 x . Cheap tax software 12/2) – $5,000     184 days     = $174. Cheap tax software 11020 = $. Cheap tax software 94625   184           The number of days for the second accrual period (November 1 through April 30) is 181 days (182 for leap years). Cheap tax software The daily OID for the second accrual period is figured as follows. Cheap tax software   ($86,409. Cheap tax software 28 x . Cheap tax software 12/2) – $5,000     181 days     = $184. Cheap tax software 55681 = $1. Cheap tax software 01965   181 If you hold the debt instrument through the end of Year 1, you must include $236. Cheap tax software 31 of OID in income. Cheap tax software This is $174. Cheap tax software 11 ($. Cheap tax software 94625 × 184 days) for the period May 1 through October 31 plus $62. Cheap tax software 20 ($1. Cheap tax software 01965 × 61 days) for the period November 1 through December 31. Cheap tax software The OID is added to the $5,000 interest income paid on October 31 of Year 1. Cheap tax software Your basis in the debt instrument is increased by the OID you include in income. Cheap tax software On January 1 of Year 2, your basis in the A Corporation debt instrument is $86,471. Cheap tax software 48 ($86,235. Cheap tax software 17 + $236. Cheap tax software 31). Cheap tax software Short first accrual period. Cheap tax software   You may have to make adjustments if a debt instrument has a short first accrual period. Cheap tax software For example, a debt instrument with 6-month accrual periods that is issued on February 15 and matures on October 31 has a short first accrual period that ends April 30. Cheap tax software (The remaining accrual periods begin on May 1 and November 1. Cheap tax software ) For this short period, figure the daily OID as described earlier, but adjust the yield for the length of the short accrual period. Cheap tax software You may use any reasonable compounding method in determining OID for a short period. Cheap tax software Examples of reasonable compounding methods include continuous compounding and monthly compounding (that is, simple interest within a month). Cheap tax software Consult your tax advisor for more information about making this computation. Cheap tax software   The OID for the final accrual period is the difference between the amount payable at maturity (other than a payment of qualified stated interest) and the adjusted issue price at the beginning of the final accrual period. Cheap tax software Reduction for acquisition premium. Cheap tax software   If you bought the debt instrument at an acquisition premium, figure the OID includible in income by reducing the daily OID by the daily acquisition premium. Cheap tax software To figure the daily acquisition premium, multiply the daily OID by the following fraction. Cheap tax software The numerator is the acquisition premium. Cheap tax software The denominator is the total OID remaining for the debt instrument after your purchase date. Cheap tax software Example 7. Cheap tax software Assume the same facts as in Example 6, except that you bought the debt instrument on November 1 of Year 1 for $87,000, after its original issue on May 1 of Year 1. Cheap tax software The adjusted issue price on November 1 of Year 1 is $86,409. Cheap tax software 28 ($86,235. Cheap tax software 17 + $174. Cheap tax software 11). Cheap tax software In this case, you paid an acquisition premium of $590. Cheap tax software 72 ($87,000 − $86,409. Cheap tax software 28). Cheap tax software The daily OID for the accrual period November 1 through April 30, reduced for the acquisition premium, is figured as follows. Cheap tax software 1) Daily OID on date of purchase (2nd accrual period) $1. Cheap tax software 01965*  2)  Acquisition premium $590. Cheap tax software 72    3)  Total OID remaining after purchase date ($13,764. Cheap tax software 83 − $174. Cheap tax software 11) 13,590. Cheap tax software 72   4) Line 2 ÷ line 3 . Cheap tax software 04346  5)  Line 1 × line 4 . Cheap tax software 04432  6)  Daily OID reduced for the acquisition premium. Cheap tax software Line 1 − line 5 $0. Cheap tax software 97533  * As shown in Example 6. Cheap tax software The total OID to include in income for Year 1 is $59. Cheap tax software 50 ($. Cheap tax software 97533 × 61 days). Cheap tax software Contingent Payment Debt Instruments This discussion shows how to figure OID on a contingent payment debt instrument issued after August 12, 1996, that was issued for cash or publicly traded property. Cheap tax software In general, a contingent payment debt instrument provides for one or more payments that are contingent as to timing or amount. Cheap tax software If you hold a contingent payment bond, you must report OID as it accrues each year. Cheap tax software Because the actual payments on a contingent payment debt instrument cannot be known in advance, issuers and holders cannot use the constant yield method (discussed earlier under Debt Instruments Issued After 1984) without making certain assumptions about the payments on the debt instrument. Cheap tax software To figure OID accruals on contingent payment debt instruments, holders and issuers must use the noncontingent bond method. Cheap tax software Noncontingent bond method. Cheap tax software    Under this method, the issuer must compute a comparable yield for the debt instrument and, based on this yield, construct a projected payment schedule for the instrument, which includes a projected fixed amount for each contingent payment. Cheap tax software In general, holders and issuers accrue OID on this projected payment schedule using the constant yield method that applies to fixed payment debt instruments. Cheap tax software When a contingent payment differs from the projected fixed amount, the holders and issuers make adjustments to their OID accruals. Cheap tax software If the actual contingent payment is larger than expected, both the issuer and the holder increase their OID accruals. Cheap tax software If the actual contingent payment is smaller than expected, holders and issuers generally decrease their OID accruals. Cheap tax software Form 1099-OID. Cheap tax software   The amount shown on Form 1099-OID in box 1 you receive for a contingent payment debt instrument may not be the correct amount to include in income. Cheap tax software For example, the amount may not be correct if the contingent payment was different from the projected amount. Cheap tax software If the amount in box 1 is not correct, you must figure the OID to report on your return under the following rules. Cheap tax software For information on showing an OID adjustment on your tax return, see How To Report OID, earlier. Cheap tax software Figuring OID. Cheap tax software   To figure OID on a contingent payment debt instrument, you need to know the “comparable yield” and “projected payment schedule” of the debt instrument. Cheap tax software The issuer must make these available to you. Cheap tax software Comparable yield. Cheap tax software   The comparable yield generally is the yield at which the issuer would issue a fixed rate debt instrument with terms and conditions similar to those of the contingent payment debt instrument. Cheap tax software The comparable yield is determined as of the debt instrument's issue date. Cheap tax software Projected payment schedule. Cheap tax software   The projected payment schedule for a contingent payment debt instrument includes all fixed payments due under the instrument and a projected fixed amount for each contingent payment. Cheap tax software The projected payment schedule is created by the issuer as of the debt instrument's issue date. Cheap tax software It is used to determine the issuer's and holder's interest accruals and adjustments. Cheap tax software Steps for figuring OID. Cheap tax software   Figure the OID on a contingent payment debt instrument in two steps. Cheap tax software Figure the OID using the constant yield method (discussed earlier under Debt Instruments Issued After 1984 ) that applies to fixed payment debt instruments. Cheap tax software Use the comparable yield as the yield to maturity. Cheap tax software In general, use the projected payment schedule to determine the instrument's adjusted issue price at the beginning of each accrual period (other than the initial period). Cheap tax software Do not treat any amount payable as qualified stated interest. Cheap tax software Adjust the OID in (1) to account for actual contingent payments. Cheap tax software If the contingent payment is greater than the projected fixed amount, you have a positive adjustment. Cheap tax software If the contingent payment is less than the projected fixed amount, you have a negative adjustment. Cheap tax software Net positive adjustment. Cheap tax software   A net positive adjustment exists for a tax year when the total of any positive adjustments described in (2) above for the tax year is more than the total of any negative adjustments for the tax year. Cheap tax software Treat a net positive adjustment as additional OID for the tax year. Cheap tax software Net negative adjustment. Cheap tax software   A net negative adjustment exists for a tax year when the total of any negative adjustments described in (2) above for the tax year is more than the total of any positive adjustments for the tax year. Cheap tax software Use a net negative adjustment to offset OID on the debt instrument for the tax year. Cheap tax software If the net negative adjustment is more than the OID on the debt instrument for the tax year, you can claim the difference as an ordinary loss. Cheap tax software However, the amount you can claim as an ordinary loss is limited to the OID on the debt instrument you included in income in prior tax years. Cheap tax software You must carry forward any net negative adjustment that is more than the total OID for the tax year and prior tax years and treat it as a negative adjustment in the next tax year. Cheap tax software Basis adjustments. Cheap tax software   In general, increase your basis in a contingent payment debt instrument by the OID included in income. Cheap tax software Your basis, however, is not affected by any negative or positive adjustments. Cheap tax software Decrease your basis by any noncontingent payment received and the projected contingent payment scheduled to be received. Cheap tax software Treatment of gain or loss on sale or exchange. Cheap tax software   If you sell a contingent payment debt instrument at a gain, your gain is ordinary income (interest income), even if you hold the debt instrument as a capital asset. Cheap tax software If you sell a contingent payment debt instrument at a loss, your loss is an ordinary loss to the extent of your prior OID accruals on the debt instrument. Cheap tax software If the debt instrument is a capital asset, treat any loss that is more than your prior OID accruals as a capital loss. Cheap tax software See Regulations section 1. Cheap tax software 1275-4 for exceptions to these rules. Cheap tax software Premium, acquisition premium, and market discount. Cheap tax software   The rules for accruing premium, acquisition premium, and market discount do not apply to a contingent payment debt instrument. Cheap tax software See Regulations section 1. Cheap tax software 1275-4 to determine how to account for these items. Cheap tax software Inflation-Indexed Debt Instruments This discussion shows how you figure OID on certain inflation-indexed debt instruments issued after January 5, 1997. Cheap tax software An inflation-indexed debt instrument is generally a debt instrument on which the payments are adjusted for inflation and d
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