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Freestatetaxreturn 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. Freestatetaxreturn Adjustment for premium. Freestatetaxreturn Adjustment for acquisition premium. Freestatetaxreturn Adjustment for market discount. Freestatetaxreturn 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. Freestatetaxreturn “Original issue discount” is defined first. Freestatetaxreturn The other terms are listed alphabetically. Freestatetaxreturn Original issue discount (OID). Freestatetaxreturn   OID is a form of interest. Freestatetaxreturn 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). Freestatetaxreturn Zero coupon bonds and debt instruments that pay no stated interest until maturity are examples of debt instruments that have OID. Freestatetaxreturn Accrual period. Freestatetaxreturn   An accrual period is an interval of time used to measure OID. Freestatetaxreturn The length of an accrual period can be 6 months, a year, or some other period, depending on when the debt instrument was issued. Freestatetaxreturn Acquisition premium. Freestatetaxreturn   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. Freestatetaxreturn A debt instrument does not have acquisition premium, however, if the debt instrument was purchased at a premium. Freestatetaxreturn See Premium, later. Freestatetaxreturn Adjusted issue price. Freestatetaxreturn   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. Freestatetaxreturn In general, the adjusted issue price at the beginning of the debt instrument's first accrual period is its issue price. Freestatetaxreturn 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. Freestatetaxreturn Debt instrument. Freestatetaxreturn   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). Freestatetaxreturn It generally does not include an annuity contract. Freestatetaxreturn Issue price. Freestatetaxreturn   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. Freestatetaxreturn Market discount. Freestatetaxreturn   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. Freestatetaxreturn 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. Freestatetaxreturn The market discount is the difference between the issue price plus accrued OID and your adjusted basis. Freestatetaxreturn Premium. Freestatetaxreturn   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. Freestatetaxreturn The premium is the excess of the adjusted basis over the payable amounts. Freestatetaxreturn See Publication 550 for information on the tax treatment of bond premium. Freestatetaxreturn Qualified stated interest. Freestatetaxreturn   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. Freestatetaxreturn Stated redemption price at maturity. Freestatetaxreturn   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. Freestatetaxreturn Yield to maturity (YTM). Freestatetaxreturn   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. Freestatetaxreturn The YTM is generally shown on the face of the debt instrument or in the literature you receive from your broker. Freestatetaxreturn If you do not have this information, consult your broker, tax advisor, or the issuer. Freestatetaxreturn 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. Freestatetaxreturn 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. Freestatetaxreturn The OID amounts listed are figured without reference to the price or date at which you acquired the debt instrument. Freestatetaxreturn 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. Freestatetaxreturn The following discussions explain what information is contained in each section of the list. Freestatetaxreturn Section I. Freestatetaxreturn   This section contains publicly offered, long-term debt instruments. Freestatetaxreturn Section I-A: Corporate Debt Instruments Issued Before 1985. Freestatetaxreturn Section I-B: Corporate Debt Instruments Issued After 1984. Freestatetaxreturn Section I-C: Inflation-Indexed Debt Instruments. Freestatetaxreturn For each publicly offered debt instrument in Section I, the list contains the following information. Freestatetaxreturn The name of the issuer. Freestatetaxreturn The Committee on Uniform Security Identification Procedures (CUSIP) number. Freestatetaxreturn The issue date. Freestatetaxreturn The maturity date. Freestatetaxreturn The issue price expressed as a percent of principal or of stated redemption price at maturity. Freestatetaxreturn The annual stated or coupon interest rate. Freestatetaxreturn (This rate is shown as 0. Freestatetaxreturn 00 if no annual interest payments are provided. Freestatetaxreturn ) The yield to maturity will be added to Section I-B for bonds issued after December 31, 2006. Freestatetaxreturn The total OID accrued up to January 1 of a calendar year. Freestatetaxreturn (This information is not available for every instrument. Freestatetaxreturn ) 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. Freestatetaxreturn The total OID per $1,000 of principal or maturity value for a calendar year and a subsequent year. Freestatetaxreturn Section II. Freestatetaxreturn   This section contains stripped coupons and principal components of U. Freestatetaxreturn S. Freestatetaxreturn Treasury and Government-Sponsored Enterprise debt instruments. Freestatetaxreturn 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. Freestatetaxreturn This section also includes debt instruments backed by U. Freestatetaxreturn S. Freestatetaxreturn Treasury securities that represent ownership interests in those securities. Freestatetaxreturn   The obligations listed in Section II are arranged by maturity date. Freestatetaxreturn The amounts listed are the total OID for a calendar year per $1,000 of redemption price. Freestatetaxreturn Section III. Freestatetaxreturn   This section contains short-term discount obligations. Freestatetaxreturn Section III-A: Short-Term U. Freestatetaxreturn S. Freestatetaxreturn Treasury Bills. Freestatetaxreturn Section III-B: Federal Home Loan Banks. Freestatetaxreturn Section III-C: Federal National Mortgage Association. Freestatetaxreturn Section III-D: Federal Farm Credit Banks. Freestatetaxreturn Section III-E: Federal Home Loan Mortgage Corporation. Freestatetaxreturn Section III-F: Federal Agricultural Mortgage Corporation. Freestatetaxreturn    Information that supplements Section III-A is available on the Internet at http://www. Freestatetaxreturn treasurydirect. Freestatetaxreturn gov/tdhome. Freestatetaxreturn htm. Freestatetaxreturn   The short-term obligations listed in this section are arranged by maturity date. Freestatetaxreturn 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. Freestatetaxreturn 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. Freestatetaxreturn Debt Instruments Not on the OID List The list of debt instruments discussed earlier does not contain the following items. Freestatetaxreturn U. Freestatetaxreturn S. Freestatetaxreturn savings bonds. Freestatetaxreturn Certificates of deposit and other face-amount certificates issued at a discount, including syndicated certificates of deposit. Freestatetaxreturn Obligations issued by tax-exempt organizations. Freestatetaxreturn OID debt instruments that matured or were entirely called by the issuer before the tables were posted on the IRS website. Freestatetaxreturn Mortgage-backed securities and mortgage participation certificates. Freestatetaxreturn Long-term OID debt instruments issued before May 28, 1969. Freestatetaxreturn Short-term obligations, other than the obligations listed in Section III. Freestatetaxreturn Debt instruments issued at a discount by states or their political subdivisions. Freestatetaxreturn REMIC regular interests and CDOs. Freestatetaxreturn Commercial paper and banker's acceptances issued at a discount. Freestatetaxreturn Obligations issued at a discount by individuals. Freestatetaxreturn Foreign obligations not traded in the United States and obligations not issued in the United States. Freestatetaxreturn 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. Freestatetaxreturn 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. Freestatetaxreturn 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. Freestatetaxreturn See Backup Withholding, later. Freestatetaxreturn 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. Freestatetaxreturn 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). Freestatetaxreturn Electronic payee statements. Freestatetaxreturn   You can issue Form 1099-OID electronically with the consent of the recipient. Freestatetaxreturn More information. Freestatetaxreturn   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. Freestatetaxreturn 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. Freestatetaxreturn 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. Freestatetaxreturn If you sell the obligation for the owner before maturity, you must file Form 1099-B to reflect the gross proceeds to the seller. Freestatetaxreturn Do not report the accrued discount to the date of sale on either Form 1099-INT or Form 1099-OID. Freestatetaxreturn 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. Freestatetaxreturn A special rule is used to determine the original issue price for information reporting on U. Freestatetaxreturn S. Freestatetaxreturn Treasury bills (T-bills) listed in Section III-A. Freestatetaxreturn 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. Freestatetaxreturn This noncompetitive discount price is the issue price (expressed as a percent of principal) shown in Section III-A. Freestatetaxreturn 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. Freestatetaxreturn Example 1. Freestatetaxreturn There are 13-week and 26-week T-bills maturing on the same date as the T-bill being redeemed. Freestatetaxreturn The price actually paid by the owner cannot be established by owner or middleman records. Freestatetaxreturn 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. Freestatetaxreturn The interest you report on Form 1099-INT is the OID (per $1,000 of principal) shown in Section III-A for that obligation. Freestatetaxreturn 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. Freestatetaxreturn For this purpose, you can rely on Section I of the OID list to determine the following information. Freestatetaxreturn Whether a debt instrument has OID. Freestatetaxreturn The OID to be reported on the Form 1099-OID. Freestatetaxreturn In general, you must report OID on publicly offered, long-term debt instruments listed in Section I. Freestatetaxreturn You also can report OID on other long-term debt instruments. Freestatetaxreturn Form 1099-OID. Freestatetaxreturn   On Form 1099-OID for a calendar year show the following information. Freestatetaxreturn Box 1. Freestatetaxreturn The OID for the actual dates the owner held the debt instruments during a calendar year. Freestatetaxreturn To determine this amount, see Figuring OID, next. Freestatetaxreturn Box 2. Freestatetaxreturn The qualified stated interest paid or credited during the calendar year. Freestatetaxreturn Interest reported here is not reported on Form 1099-INT. Freestatetaxreturn The qualified stated interest on Treasury inflation-protected securities may be reported on Form 1099-INT in box 3 instead. Freestatetaxreturn Box 3. Freestatetaxreturn Any interest or principal forfeited because of an early withdrawal that the owner can deduct from gross income. Freestatetaxreturn Do not reduce the amounts in boxes 1 and 2 by the forfeiture. Freestatetaxreturn Box 4. Freestatetaxreturn Any backup withholding for this debt instrument. Freestatetaxreturn Box 7. Freestatetaxreturn The CUSIP number, if any. Freestatetaxreturn 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. Freestatetaxreturn 50 2006). Freestatetaxreturn If the issuer of the debt instrument is other than the payer, show the name of the issuer in this box. Freestatetaxreturn Box 8. Freestatetaxreturn The OID on a U. Freestatetaxreturn S. Freestatetaxreturn Treasury obligation for the part of the year the owner held the debt instrument. Freestatetaxreturn Box 9. Freestatetaxreturn Investment expenses passed on to holders of a single-class REMIC. Freestatetaxreturn Boxes 10-12. Freestatetaxreturn Use to report any state income tax withheld for this debt instrument. Freestatetaxreturn Figuring OID. Freestatetaxreturn   You can determine the OID on a long-term debt instrument by using either of the following. Freestatetaxreturn Section I of the OID list. Freestatetaxreturn The income tax regulations. Freestatetaxreturn Using Section I. Freestatetaxreturn   If the owner held the debt instrument for the entire calendar year, report the OID shown in Section I for the calendar year. Freestatetaxreturn 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. Freestatetaxreturn For example, if the debt instrument's stated redemption price at maturity is $500, report one-half the listed OID. Freestatetaxreturn   If the owner held the debt instrument for less than the entire calendar year, figure the OID to report as follows. Freestatetaxreturn Look up the daily OID for the first accrual period in the calendar year during which the owner held the debt instrument. Freestatetaxreturn Multiply the daily OID by the number of days the owner held the debt instrument during that accrual period. Freestatetaxreturn Repeat steps (1) and (2) for any remaining accrual periods for the year during which the owner held the debt instrument. Freestatetaxreturn Add the results in steps (2) and (3) to determine the owner's OID per $1,000 of stated redemption price at maturity. Freestatetaxreturn If necessary, adjust the OID in (4) to reflect the debt instrument's stated redemption price at maturity. Freestatetaxreturn Report the result on Form 1099-OID in box 1. Freestatetaxreturn Using the income tax regulations. Freestatetaxreturn   Instead of using Section I to figure OID, you can use the regulations under sections 1272 through 1275 of the Internal Revenue Code. Freestatetaxreturn 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. Freestatetaxreturn (If you use Section I-B, the OID is figured using 6-month accrual periods. Freestatetaxreturn )   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. Freestatetaxreturn 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. Freestatetaxreturn You must file an information return showing the reportable interest and OID, if any, on the CD. Freestatetaxreturn These rules apply whether or not you sold the CD to the owner. Freestatetaxreturn Report OID on a CD in the same way as OID on other debt instruments. Freestatetaxreturn See Short-Term Obligations Redeemed at Maturity and Long-Term Debt Instruments, earlier. Freestatetaxreturn 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. Freestatetaxreturn However, do not report the interest if either of the following apply. Freestatetaxreturn You hold the bond as a nominee for the true owner. Freestatetaxreturn The payee is a foreign person. Freestatetaxreturn See Payments to foreign person under Backup Withholding, later. Freestatetaxreturn 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. Freestatetaxreturn The coupon may have been “stripped” (separated) from the bond and separately purchased. Freestatetaxreturn 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. Freestatetaxreturn 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%. Freestatetaxreturn The backup withholding is deducted at the time a cash payment is made. Freestatetaxreturn See Pub. Freestatetaxreturn 1281, Backup Withholding for Missing and Incorrect Name/TIN(s), for more information. Freestatetaxreturn Backup withholding generally applies in the following situations. Freestatetaxreturn The payee does not give you a taxpayer identification number (TIN). Freestatetaxreturn The IRS notifies you that the payee gave an incorrect TIN. Freestatetaxreturn The IRS notifies you that the payee is subject to backup withholding due to payee underreporting. Freestatetaxreturn 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. Freestatetaxreturn However, for short-term discount obligations (other than government obligations), bearer bonds and coupons, and U. Freestatetaxreturn S. Freestatetaxreturn 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. Freestatetaxreturn Short-term obligations. Freestatetaxreturn   Backup withholding applies to OID on a short-term obligation only when the OID is paid at maturity. Freestatetaxreturn However, backup withholding applies to any interest payable before maturity when the interest is paid or credited. Freestatetaxreturn   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. Freestatetaxreturn 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. Freestatetaxreturn If the purchase price of a listed obligation is not established or is disregarded, you must use the issue price shown in Section III. Freestatetaxreturn Long-term obligations. Freestatetaxreturn   If no cash payments are made on a long-term obligation before maturity, backup withholding applies only at maturity. Freestatetaxreturn The amount subject to backup withholding is the OID includible in the owner's gross income for the calendar year when the obligation matures. Freestatetaxreturn The amount to be withheld is limited to the cash paid. Freestatetaxreturn Registered long-term obligations with cash payments. Freestatetaxreturn   If a registered long-term obligation has cash payments before maturity, backup withholding applies when a cash payment is made. Freestatetaxreturn 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. Freestatetaxreturn 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. Freestatetaxreturn For any payment, the required withholding is limited to the cash paid. Freestatetaxreturn Payee not the original owner. Freestatetaxreturn   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). Freestatetaxreturn The amount subject to backup withholding at maturity of a listed obligation must be determined using the issue price shown in Section I. Freestatetaxreturn Bearer long-term obligations with cash payments. Freestatetaxreturn   If a bearer long-term obligation has cash payments before maturity, backup withholding applies when the cash payments are made. Freestatetaxreturn 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. Freestatetaxreturn 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. Freestatetaxreturn The required withholding at maturity is limited to the cash paid. Freestatetaxreturn Sales and redemptions. Freestatetaxreturn   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. Freestatetaxreturn Backup withholding applies in the following situations. Freestatetaxreturn The payee does not give you a TIN. Freestatetaxreturn The IRS notifies you that the payee gave an incorrect TIN. Freestatetaxreturn 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. Freestatetaxreturn Payments outside the United States to U. Freestatetaxreturn S. Freestatetaxreturn person. Freestatetaxreturn   The requirements for backup withholding and information reporting apply to payments of OID and interest made outside the United States to a U. Freestatetaxreturn S. Freestatetaxreturn 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. Freestatetaxreturn S. Freestatetaxreturn trade or business. Freestatetaxreturn Payments to foreign person. Freestatetaxreturn   The following discussions explain the rules for backup withholding and information reporting on payments to foreign persons. Freestatetaxreturn U. Freestatetaxreturn S. Freestatetaxreturn -source amount. Freestatetaxreturn   Backup withholding and information reporting are not required for payments of U. Freestatetaxreturn S. Freestatetaxreturn -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. Freestatetaxreturn A U. Freestatetaxreturn S. Freestatetaxreturn resident is not a foreign person. Freestatetaxreturn 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. Freestatetaxreturn 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. Freestatetaxreturn S. Freestatetaxreturn person. Freestatetaxreturn   For information about the 28% withholding tax that may apply to payments of U. Freestatetaxreturn S. Freestatetaxreturn -source OID or interest to foreign persons, see Publication 515. Freestatetaxreturn Foreign-source amount. Freestatetaxreturn   Backup withholding and information reporting are not required for payments of foreign-source OID and interest made outside the United States. Freestatetaxreturn 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. Freestatetaxreturn More information. Freestatetaxreturn   For more information about backup withholding and information reporting on foreign-source amounts or payments to foreign persons, see Regulations section 1. Freestatetaxreturn 6049-5. Freestatetaxreturn Information for Owners of OID Debt Instruments This section is for persons who prepare their own tax returns. Freestatetaxreturn It discusses the income tax rules for figuring and reporting OID on long-term debt instruments. Freestatetaxreturn 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. Freestatetaxreturn However, the information provided does not cover every situation. Freestatetaxreturn More information can be found in the regulations under sections 1271 through 1275 of the Internal Revenue Code. Freestatetaxreturn Including OID in income. Freestatetaxreturn   Generally, you include OID in income as it accrues each year, whether or not you receive any payments from the debt instrument issuer. Freestatetaxreturn Exceptions. Freestatetaxreturn   The rules for including OID in income as it accrues generally do not apply to the following debt instruments. Freestatetaxreturn U. Freestatetaxreturn S. Freestatetaxreturn savings bonds. Freestatetaxreturn Tax-exempt obligations. Freestatetaxreturn (However, see Tax-Exempt Bonds and Coupons, later. Freestatetaxreturn ) Obligations issued by individuals before March 2, 1984. Freestatetaxreturn Loans of $10,000 or less between individuals who are not in the business of lending money. Freestatetaxreturn (The dollar limit includes outstanding prior loans by the lender to the borrower. Freestatetaxreturn ) This exception does not apply if a principal purpose of the loan is to avoid any federal tax. Freestatetaxreturn   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. Freestatetaxreturn Publication 550 also discusses rules for holders of REMIC interests and CDOs. Freestatetaxreturn De minimis rule. Freestatetaxreturn   You can treat OID as zero if the total OID on a debt instrument is less than one-fourth of 1% (. Freestatetaxreturn 0025) of the stated redemption price at maturity multiplied by the number of full years from the date of original issue to maturity. Freestatetaxreturn Debt instruments with de minimis OID are not listed in this publication. Freestatetaxreturn 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. Freestatetaxreturn Also, the de minimis rules generally do not apply to tax-exempt obligations. Freestatetaxreturn Example 2. Freestatetaxreturn 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. Freestatetaxreturn 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. Freestatetaxreturn Under the de minimis rule, you can treat the OID as zero because the $20 discount is less than $25. Freestatetaxreturn Example 3. Freestatetaxreturn Assume the same facts as Example 2, except the debt instrument was issued at $950. Freestatetaxreturn You must report part of the $50 OID each year because it is more than $25. Freestatetaxreturn Choice to report all interest as OID. Freestatetaxreturn   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. Freestatetaxreturn See Constant yield method under Debt Instruments Issued After 1984, later, for more information. Freestatetaxreturn   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. Freestatetaxreturn For more information, see Regulations section 1. Freestatetaxreturn 1272-3. Freestatetaxreturn Purchase after date of original issue. Freestatetaxreturn   A debt instrument you purchased after the date of original issue may have premium, acquisition premium, or market discount. Freestatetaxreturn If so, the OID reported to you on Form 1099-OID may have to be adjusted. Freestatetaxreturn For more information, see Showing an OID adjustment under How To Report OID, later. Freestatetaxreturn The following rules generally do not apply to contingent payment debt instruments. Freestatetaxreturn Adjustment for premium. Freestatetaxreturn   If your debt instrument (other than an inflation-indexed debt instrument) has premium, do not report any OID as ordinary income. Freestatetaxreturn Your adjustment is the total OID shown on your Form 1099-OID. Freestatetaxreturn Adjustment for acquisition premium. Freestatetaxreturn   If your debt instrument has acquisition premium, reduce the OID you report. Freestatetaxreturn 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. Freestatetaxreturn Adjustment for market discount. Freestatetaxreturn   If your debt instrument has market discount that you choose to include in income currently, increase the OID you report. Freestatetaxreturn Your adjustment is the accrued market discount for the year. Freestatetaxreturn 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. Freestatetaxreturn If you choose to use the constant yield method to figure accrued market discount, also see Figuring OID on Long-Term Debt Instruments, later. Freestatetaxreturn The constant yield method of figuring accrued OID, explained in those discussions under Constant yield method, is also used to figure accrued market discount. Freestatetaxreturn For more information concerning premium or market discount on an inflation-indexed debt instrument, see Regulations section 1. Freestatetaxreturn 1275-7. Freestatetaxreturn Sale, exchange, or redemption. Freestatetaxreturn   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. Freestatetaxreturn If you sold the debt instrument through a broker, you should receive Form 1099-B or an equivalent statement from the broker. Freestatetaxreturn Use the Form 1099-B or other statement and your brokerage statements to complete Form 8949, and Schedule D (Form 1040). Freestatetaxreturn   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. Freestatetaxreturn Your basis, generally, is your cost increased by the OID you have included in income each year you held it. Freestatetaxreturn 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. Freestatetaxreturn   See chapter 4 of Publication 550 for more information about the tax treatment of the sale or redemption of discounted debt instruments. Freestatetaxreturn Example 4. Freestatetaxreturn Larry, a calendar year taxpayer, bought a corporate debt instrument at original issue for $86,235. Freestatetaxreturn 00 on November 1 of Year 1. Freestatetaxreturn The 15-year debt instrument matures on October 31 of Year 16 at a stated redemption price of $100,000. Freestatetaxreturn The debt instrument provides for semiannual payments of interest at 10%. Freestatetaxreturn Assume the debt instrument is a capital asset in Larry's hands. Freestatetaxreturn The debt instrument has $13,765. Freestatetaxreturn 00 of OID ($100,000 stated redemption price at maturity minus $86,235. Freestatetaxreturn 00 issue price). Freestatetaxreturn Larry sold the debt instrument for $90,000 on November 1 of Year 4. Freestatetaxreturn Including the OID he will report for the period he held the debt instrument in Year 4, Larry has included $4,556. Freestatetaxreturn 00 of OID in income and has increased his basis by that amount to $90,791. Freestatetaxreturn 00. Freestatetaxreturn Larry has realized a loss of $791. Freestatetaxreturn 00. Freestatetaxreturn All of Larry's loss is capital loss. Freestatetaxreturn 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. Freestatetaxreturn Form 1099-OID shows all OID income in box 1 except OID on a U. Freestatetaxreturn S. Freestatetaxreturn Treasury obligation, which is shown in box 8. Freestatetaxreturn It also shows, in box 2, any qualified stated interest you must include in income. Freestatetaxreturn (However, any qualified stated interest on Treasury inflation-protected securities can be reported on Form 1099-INT in box 3. Freestatetaxreturn ) A copy of Form 1099-OID will be sent to the IRS. Freestatetaxreturn Do not attach your copy to your tax return. Freestatetaxreturn Keep it for your records. Freestatetaxreturn 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. Freestatetaxreturn 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. Freestatetaxreturn Form 1099-OID not received. Freestatetaxreturn   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. Freestatetaxreturn Refiguring OID. Freestatetaxreturn   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. Freestatetaxreturn You bought the debt instrument at a premium or at an acquisition premium. Freestatetaxreturn The debt instrument is a stripped bond or coupon (including zero coupon bonds backed by U. Freestatetaxreturn S. Freestatetaxreturn Treasury securities). Freestatetaxreturn The debt instrument is a contingent payment or inflation-indexed debt instrument. Freestatetaxreturn See the discussions under Figuring OID on Long-Term Debt Instruments or Figuring OID on Stripped Bonds and Coupons, later, for the specific computations. Freestatetaxreturn Refiguring interest. Freestatetaxreturn   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. Freestatetaxreturn Nominee. Freestatetaxreturn   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. Freestatetaxreturn ” You must file another Form 1099-OID for each actual owner, showing the OID for the owner. Freestatetaxreturn Show the owner of the debt instrument as the “recipient” and you as the “payer. Freestatetaxreturn ”   Complete Form 1099-OID and Form 1096 and file the forms with the Internal Revenue Service Center for your area. Freestatetaxreturn You must also give a copy of the Form 1099-OID to the actual owner. Freestatetaxreturn However, you are not required to file a nominee return to show amounts belonging to your spouse. Freestatetaxreturn See the Form 1099 instructions for more information. Freestatetaxreturn   When preparing your tax return, follow the instructions under Showing an OID adjustment in the next discussion. Freestatetaxreturn 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. Freestatetaxreturn Form 1040 or Form 1040A required. Freestatetaxreturn   You must use Form 1040 or Form 1040A (you cannot use Form 1040EZ) under either of the following conditions. Freestatetaxreturn You received a Form 1099-OID as a nominee for the actual owner. Freestatetaxreturn Your total interest and OID income for the year was more than $1,500. Freestatetaxreturn Form 1040 required. Freestatetaxreturn   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. Freestatetaxreturn 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. Freestatetaxreturn Also, you must use Form 1040 if you were charged an early withdrawal penalty. Freestatetaxreturn Where to report. Freestatetaxreturn   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. Freestatetaxreturn Include all OID and periodic interest shown on any Form 1099-OID, boxes 1, 2, and 8, you received for the tax year. Freestatetaxreturn Also include any other OID and interest income for which you did not receive a Form 1099. Freestatetaxreturn Showing an OID adjustment. Freestatetaxreturn   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. Freestatetaxreturn   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. Freestatetaxreturn If the OID, as adjusted, is less than the amount shown on Form 1099-OID, show the adjustment as follows. Freestatetaxreturn Under your last entry on line 1, subtotal all interest and OID income listed on line 1. Freestatetaxreturn Below the subtotal, write “Nominee Distribution” or “OID Adjustment” and show the OID you are not required to report. Freestatetaxreturn Subtract that OID from the subtotal and enter the result on line 2. Freestatetaxreturn If the OID, as adjusted, is more than the amount shown on Form 1099-OID, show the adjustment as follows. Freestatetaxreturn Under your last entry on line 1, subtotal all interest and OID income listed on line 1. Freestatetaxreturn Below the subtotal, write “OID Adjustment” and show the additional OID. Freestatetaxreturn Add that OID to the subtotal and enter the result on line 2. Freestatetaxreturn 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. Freestatetaxreturn It also may depend on the type of the debt instrument. Freestatetaxreturn There are different rules for each of the following debt instruments. Freestatetaxreturn Corporate debt instruments issued after 1954 and before May 28, 1969, and government debt instruments issued after 1954 and before July 2, 1982. Freestatetaxreturn Corporate debt instruments issued after May 27, 1969, and before July 2, 1982. Freestatetaxreturn Debt instruments issued after July 1, 1982, and before 1985. Freestatetaxreturn Debt instruments issued after 1984 (other than debt instruments described in (5) and (6)). Freestatetaxreturn Contingent payment debt instruments issued after August 12, 1996. Freestatetaxreturn Inflation-indexed debt instruments (including Treasury inflation-protected securities) issued after January 5, 1997. Freestatetaxreturn Zero coupon bonds. Freestatetaxreturn   The rules for figuring OID on zero coupon bonds backed by U. Freestatetaxreturn S. Freestatetaxreturn Treasury securities are discussed under Figuring OID on Stripped Bonds and Coupons, later. Freestatetaxreturn 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. Freestatetaxreturn The OID, which is taxed as ordinary income, generally equals the following amount. Freestatetaxreturn   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. Freestatetaxreturn If there is a loss on the sale of the debt instrument, the entire loss is a capital loss and no OID is reported. Freestatetaxreturn 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. Freestatetaxreturn For information about showing the correct OID on your tax return, see the discussion under How To Report OID, earlier. Freestatetaxreturn Your basis in the debt instrument is increased by the OID you include in income. Freestatetaxreturn Form 1099-OID. Freestatetaxreturn   You should receive a Form 1099-OID showing OID for the part of the year you held the debt instrument. Freestatetaxreturn However, if you paid an acquisition premium, you may need to refigure the OID to report on your tax return. Freestatetaxreturn See Reduction for acquisition premium, later. Freestatetaxreturn 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. Freestatetaxreturn irs. Freestatetaxreturn gov/pub1212 by clicking the link under Recent Developments. Freestatetaxreturn Form 1099-OID not received. Freestatetaxreturn    The OID listed is for each $1,000 of redemption price. Freestatetaxreturn You must adjust the listed amount if your debt instrument has a different principal amount. Freestatetaxreturn For example, if you have a debt instrument with a $500 principal amount, use one-half the listed amount to figure your OID. Freestatetaxreturn   If you held the debt instrument the entire year, use the OID shown in Section I-A for a calendar year. Freestatetaxreturn (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. Freestatetaxreturn ) If you did not hold the debt instrument the entire year, figure your OID using the following method. Freestatetaxreturn Divide the OID shown by 12. Freestatetaxreturn 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. Freestatetaxreturn This is the OID to include in income unless you paid an acquisition premium. Freestatetaxreturn The reduction for acquisition premium is discussed next. Freestatetaxreturn Reduction for acquisition premium. Freestatetaxreturn   If you bought the debt instrument at an acquisition premium, figure the OID to include in income as follows. Freestatetaxreturn 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. Freestatetaxreturn This is the monthly OID. Freestatetaxreturn Subtract from your cost the issue price and the accumulated OID from the date of issue to the date of purchase. Freestatetaxreturn (If the result is zero or less, stop here. Freestatetaxreturn You did not pay an acquisition premium. Freestatetaxreturn ) 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. Freestatetaxreturn Subtract the amount figured in (3) from the amount figured in (1). Freestatetaxreturn This is the OID to include in income for each month you hold the debt instrument during the year. Freestatetaxreturn Transfers during the month. Freestatetaxreturn   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. Freestatetaxreturn Your holding period for this purpose begins the day you acquire the debt instrument and ends the day before you dispose of it. Freestatetaxreturn 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. Freestatetaxreturn For information about showing the correct OID on your tax return, see How To Report OID, earlier. Freestatetaxreturn Form 1099-OID. Freestatetaxreturn   You should receive a Form 1099-OID showing OID for the part of the year you held the debt instrument. Freestatetaxreturn However, if you paid an acquisition premium, you may need to refigure the OID to report on your tax return. Freestatetaxreturn See Constant yield method and the discussions on acquisition premium that follow, later. Freestatetaxreturn 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. Freestatetaxreturn irs. Freestatetaxreturn gov/pub1212 by clicking the link under Recent Developments. Freestatetaxreturn Form 1099-OID not received. Freestatetaxreturn    The OID listed is for each $1,000 of redemption price. Freestatetaxreturn You must adjust the listed amount if your debt instrument has a different principal amount. Freestatetaxreturn For example, if you have a debt instrument with a $500 principal amount, use one-half the listed amount to figure your OID. Freestatetaxreturn   If you held the debt instrument the entire year, use the OID shown in Section I-A. Freestatetaxreturn (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. Freestatetaxreturn ) If you did not hold the debt instrument the entire year, figure your OID using either of the following methods. Freestatetaxreturn Method 1. Freestatetaxreturn    Divide the total OID for a calendar year by 365 (366 for leap years). Freestatetaxreturn Multiply the result in (1) by the number of days you held the debt instrument during that particular year. Freestatetaxreturn  This computation is an approximation and may result in a slightly higher OID than Method 2. Freestatetaxreturn Method 2. Freestatetaxreturn    Look up the daily OID for the first accrual period you held the debt instrument during a calendar year. Freestatetaxreturn (See Accrual period under Constant yield method, next. Freestatetaxreturn ) Multiply the daily OID by the number of days you held the debt instrument during that accrual period. Freestatetaxreturn If you held the debt instrument for part of both accrual periods, repeat (1) and (2) for the second accrual period. Freestatetaxreturn Add the results of (2) and (3). Freestatetaxreturn This is the OID to include in income, unless you paid an acquisition premium. Freestatetaxreturn (The reduction for acquisition premium is discussed later. Freestatetaxreturn ) Constant yield method. Freestatetaxreturn   This discussion shows how to figure OID on debt instruments issued after July 1, 1982, and before 1985, using a constant yield method. Freestatetaxreturn OID is allocated over the life of the debt instrument through adjustments to the issue price for each accrual period. Freestatetaxreturn   Figure the OID allocable to any accrual period as follows. Freestatetaxreturn Multiply the adjusted issue price at the beginning of the accrual period by the debt instrument's yield to maturity. Freestatetaxreturn Subtract from the result in (1) any qualified stated interest allocable to the accrual period. Freestatetaxreturn Accrual period. Freestatetaxreturn   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. Freestatetaxreturn Your tax year will usually include parts of two accrual periods. Freestatetaxreturn Daily OID. Freestatetaxreturn   The OID for any accrual period is allocated equally to each day in the accrual period. Freestatetaxreturn You must include in income the sum of the OID amounts for each day you hold the debt instrument during the year. Freestatetaxreturn If your tax year includes parts of two or more accrual periods, you must include the proper daily OID amounts for each accrual period. Freestatetaxreturn Figuring daily OID. Freestatetaxreturn   The daily OID for the initial accrual period is figured using the following formula. Freestatetaxreturn   (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. Freestatetaxreturn Reduction for acquisition premium on debt instruments purchased before July 19, 1984. Freestatetaxreturn   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. Freestatetaxreturn 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. Freestatetaxreturn Reduction for acquisition premium on debt instruments purchased after July 18, 1984. Freestatetaxreturn   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. Freestatetaxreturn However, the method of figuring the daily acquisition premium is different from the method described in the preceding discussion. Freestatetaxreturn To figure the daily acquisition premium under this method, multiply the daily OID by the following fraction. Freestatetaxreturn The numerator is the acquisition premium. Freestatetaxreturn The denominator is the total OID remaining for the debt instrument after your purchase date. Freestatetaxreturn Section I-A is available at www. Freestatetaxreturn irs. Freestatetaxreturn gov/pub1212 and clicking the link under Recent Developments. Freestatetaxreturn Using Section I-A to figure accumulated OID. Freestatetaxreturn   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. Freestatetaxreturn The amount from the “Total OID to January 1, YYYY” column for your debt instrument. Freestatetaxreturn The OID from January 1 of a calendar year to the date of purchase, figured as follows. Freestatetaxreturn 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. Freestatetaxreturn 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. Freestatetaxreturn Add the amounts figured in (2a) and (2b). Freestatetaxreturn 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. Freestatetaxreturn You must include the OID in gross income whether or not you hold the debt instrument as a capital asset. Freestatetaxreturn Your basis in the debt instrument is increased by the OID you include in income. Freestatetaxreturn For information about showing the correct OID on your tax return, see How To Report OID, earlier. Freestatetaxreturn Form 1099-OID. Freestatetaxreturn   You should receive a Form 1099-OID showing OID for the part of a calendar year you held the debt instrument. Freestatetaxreturn However, if you paid an acquisition premium, you may need to refigure the OID to report on your tax return. Freestatetaxreturn See Constant yield method and Reduction for acquisition premium, later. Freestatetaxreturn   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. Freestatetaxreturn See Contingent Payment Debt Instruments or Inflation-Indexed Debt Instruments, later. Freestatetaxreturn 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. Freestatetaxreturn irs. Freestatetaxreturn gov/pub1212 by clicking the link under Recent Developments. Freestatetaxreturn Form 1099-OID not received. Freestatetaxreturn   The OID listed is for each $1,000 of redemption price. Freestatetaxreturn You must adjust the listed amount if your debt instrument has a different principal amount. Freestatetaxreturn For example, if you have a debt instrument with a $500 principal amount, use one-half the listed amount to figure your OID. Freestatetaxreturn   Use the OID shown in Section I-B for a calendar year if you held the debt instrument the entire year. Freestatetaxreturn (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. Freestatetaxreturn ) If you did not hold the debt instrument the entire year, figure your OID as follows. Freestatetaxreturn Look up the daily OID for the first accrual period in which you held the debt instrument during a calendar year. Freestatetaxreturn (See Accrual period under Constant yield method, later. Freestatetaxreturn ) Multiply the daily OID by the number of days you held the debt instrument during that accrual period. Freestatetaxreturn Repeat (1) and (2) for any remaining accrual periods in which you held the debt instrument. Freestatetaxreturn Add the results of (2) and (3). Freestatetaxreturn This is the OID to include in income for that year, unless you paid an acquisition premium. Freestatetaxreturn (The reduction for acquisition premium is discussed later. Freestatetaxreturn ) Tax-exempt bond. Freestatetaxreturn   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. Freestatetaxreturn You need to make this adjustment to determine if you have a gain or loss on a later disposition of the bond. Freestatetaxreturn In general, use the rules that follow to determine your OID. Freestatetaxreturn Constant yield method. Freestatetaxreturn   This discussion shows how to figure OID on debt instruments issued after 1984 using a constant yield method. Freestatetaxreturn (The special rules that apply to contingent payment debt instruments and inflation-indexed debt instruments are explained later. Freestatetaxreturn ) OID is allocated over the life of the debt instrument through adjustments to the issue price for each accrual period. Freestatetaxreturn   Figure the OID allocable to any accrual period as follows. Freestatetaxreturn Multiply the adjusted issue price at the beginning of the accrual period by a fraction. Freestatetaxreturn The numerator of the fraction is the debt instrument's yield to maturity and the denominator is the number of accrual periods per year. Freestatetaxreturn The yield must be stated appropriately taking into account the length of the particular accrual period. Freestatetaxreturn Subtract from the result in (1) any qualified stated interest allocable to the accrual period. Freestatetaxreturn Accrual period. Freestatetaxreturn   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. Freestatetaxreturn For example, a debt instrument maturing on March 31 has accrual periods that end on September 30 and March 31 of each calendar year. Freestatetaxreturn Any short period is included as the first accrual period. Freestatetaxreturn   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. Freestatetaxreturn However, the OID listed for these debt instruments in Section I-B has been figured using 6-month accrual periods. Freestatetaxreturn Daily OID. Freestatetaxreturn   The OID for any accrual period is allocated equally to each day in the accrual period. Freestatetaxreturn Figure the amount to include in income by adding the OID for each day you hold the debt instrument during the year. Freestatetaxreturn 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. Freestatetaxreturn 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. Freestatetaxreturn Figuring daily OID. Freestatetaxreturn   The daily OID for the initial accrual period is figured using the following formula. Freestatetaxreturn   (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. Freestatetaxreturn Example 5. Freestatetaxreturn On January 1 of Year 1, you bought a 15-year, 10% debt instrument of A Corporation at original issue for $86,235. Freestatetaxreturn 17. Freestatetaxreturn According to the prospectus, the debt instrument matures on December 31 of Year 15 at a stated redemption price of $100,000. Freestatetaxreturn The yield to maturity is 12%, compounded semiannually. Freestatetaxreturn The debt instrument provides for qualified stated interest payments of $5,000 on June 30 and December 31 of each calendar year. Freestatetaxreturn The accrual periods are the 6-month periods ending on each of these dates. Freestatetaxreturn The number of days for the first accrual period (January 1 through June 30) is 181 days (182 for leap years). Freestatetaxreturn The daily OID for the first accrual period is figured as follows. Freestatetaxreturn   ($86,235. Freestatetaxreturn 17 x . Freestatetaxreturn 12/2) – $5,000     181 days     = $174. Freestatetaxreturn 11020 = $. Freestatetaxreturn 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. Freestatetaxreturn 17 + $174. Freestatetaxreturn 11), or $86,409. Freestatetaxreturn 28. Freestatetaxreturn The number of days for the second accrual period (July 1 through December 31) is 184 days. Freestatetaxreturn The daily OID for the second accrual period is figured as follows. Freestatetaxreturn   ($86,409. Freestatetaxreturn 28 x . Freestatetaxreturn 12/2) – $5,000     184 days     = $184. Freestatetaxreturn 55681 = $1. Freestatetaxreturn 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, $174. Freestatetaxreturn 11 ($. Freestatetaxreturn 95665 × 182 days) plus $184. Freestatetaxreturn 56 ($1. Freestatetaxreturn 00303 × 184 days), or $358. Freestatetaxreturn 67. Freestatetaxreturn Add the OID to the $10,000 interest you report on your income tax return for Year 1. Freestatetaxreturn Example 6. Freestatetaxreturn 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. Freestatetaxreturn Also, the interest payment dates are October 31 and April 30 of each calendar year. Freestatetaxreturn The accrual periods are the 6-month periods ending on each of these dates. Freestatetaxreturn The number of days for the first accrual period (May 1 through October 31) is 184 days. Freestatetaxreturn The daily OID for the first accrual period is figured as follows. Freestatetaxreturn   ($86,235. Freestatetaxreturn 17 x . Freestatetaxreturn 12/2) – $5,000     184 days     = $174. Freestatetaxreturn 11020 = $. Freestatetaxreturn 94625   184           The number of days for the second accrual period (November 1 through April 30) is 181 days (182 for leap years). Freestatetaxreturn The daily OID for the second accrual period is figured as follows. Freestatetaxreturn   ($86,409. Freestatetaxreturn 28 x . Freestatetaxreturn 12/2) – $5,000     181 days     = $184. Freestatetaxreturn 55681 = $1. Freestatetaxreturn 01965   181 If you hold the debt instrument through the end of Year 1, you must include $236. Freestatetaxreturn 31 of OID in income. Freestatetaxreturn This is $174. Freestatetaxreturn 11 ($. Freestatetaxreturn 94625 × 184 days) for the period May 1 through October 31 plus $62. Freestatetaxreturn 20 ($1. Freestatetaxreturn 01965 × 61 days) for the period November 1 through December 31. Freestatetaxreturn The OID is added to the $5,000 interest income paid on October 31 of Year 1. Freestatetaxreturn Your basis in the debt instrument is increased by the OID you include in income. Freestatetaxreturn On January 1 of Year 2, your basis in the A Corporation debt instrument is $86,471. Freestatetaxreturn 48 ($86,235. Freestatetaxreturn 17 + $236. Freestatetaxreturn 31). Freestatetaxreturn Short first accrual period. Freestatetaxreturn   You may have to make adjustments if a debt instrument has a short first accrual period. Freestatetaxreturn 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. Freestatetaxreturn (The remaining accrual periods begin on May 1 and November 1. Freestatetaxreturn ) For this short period, figure the daily OID as described earlier, but adjust the yield for the length of the short accrual period. Freestatetaxreturn You may use any reasonable compounding method in determining OID for a short period. Freestatetaxreturn Examples of reasonable compounding methods include continuous compounding and monthly compounding (that is, simple interest within a month). Freestatetaxreturn Consult your tax advisor for more information about making this computation. Freestatetaxreturn   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. Freestatetaxreturn Reduction for acquisition premium. Freestatetaxreturn   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. Freestatetaxreturn To figure the daily acquisition premium, multiply the daily OID by the following fraction. Freestatetaxreturn The numerator is the acquisition premium. Freestatetaxreturn The denominator is the total OID remaining for the debt instrument after your purchase date. Freestatetaxreturn Example 7. Freestatetaxreturn 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. Freestatetaxreturn The adjusted issue price on November 1 of Year 1 is $86,409. Freestatetaxreturn 28 ($86,235. Freestatetaxreturn 17 + $174. Freestatetaxreturn 11). Freestatetaxreturn In this case, you paid an acquisition premium of $590. Freestatetaxreturn 72 ($87,000 − $86,409. Freestatetaxreturn 28). Freestatetaxreturn The daily OID for the accrual period November 1 through April 30, reduced for the acquisition premium, is figured as follows. Freestatetaxreturn 1) Daily OID on date of purchase (2nd accrual period) $1. Freestatetaxreturn 01965*  2)  Acquisition premium $590. Freestatetaxreturn 72    3)  Total OID remaining after purchase date ($13,764. Freestatetaxreturn 83 − $174. Freestatetaxreturn 11) 13,590. Freestatetaxreturn 72   4) Line 2 ÷ line 3 . Freestatetaxreturn 04346  5)  Line 1 × line 4 . Freestatetaxreturn 04432  6)  Daily OID reduced for the acquisition premium. Freestatetaxreturn Line 1 − line 5 $0. Freestatetaxreturn 97533  * As shown in Example 6. Freestatetaxreturn The total OID to include in income for Year 1 is $59. Freestatetaxreturn 50 ($. Freestatetaxreturn 97533 × 61 days). Freestatetaxreturn 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. Freestatetaxreturn In general, a contingent payment debt instrument provides for one or more payments that are contingent as to timing or amount. Freestatetaxreturn If you hold a contingent payment bond, you must report OID as it accrues each year. Freestatetaxreturn 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. Freestatetaxreturn To figure OID accruals on contingent payment debt instruments, holders and issuers must use the noncontingent bond method. Freestatetaxreturn Noncontingent bond method. Freestatetaxreturn    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. Freestatetaxreturn In general, holders and issuers accrue OID on this projected payment schedule using the constant yield method that applies to fixed payment debt instruments. Freestatetaxreturn When a contingent payment differs from the projected fixed amount, the holders and issuers make adjustments to their OID accruals. Freestatetaxreturn If the actual contingent payment is larger than expected, both the issuer and the holder increase their OID accruals. Freestatetaxreturn If the actual contingent payment is smaller than expected, holders and issuers generally decrease their OID accruals. Freestatetaxreturn Form 1099-OID. Freestatetaxreturn   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. Freestatetaxreturn For example, the amount may not be correct if the contingent payment was different from the projected amount. Freestatetaxreturn If the amount in box 1 is not correct, you must figure the OID to report on your return under the following rules. Freestatetaxreturn For information on showing an OID adjustment on your tax return, see How To Report OID, earlier. Freestatetaxreturn Figuring OID. Freestatetaxreturn   To figure OID on a contingent payment debt instrument, you need to know the “comparable yield” and “projected payment schedule” of the debt instrument. Freestatetaxreturn The issuer must make these available to you. Freestatetaxreturn Comparable yield. Freestatetaxreturn   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. Freestatetaxreturn The comparable yield is determined as of the debt instrument's issue date. Freestatetaxreturn Projected payment schedule. Freestatetaxreturn   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. Freestatetaxreturn The projected payment schedule is created by the issuer as of the debt instrument's issue date. Freestatetaxreturn It is used to determine the issuer's and holder's interest accruals and adjustments. Freestatetaxreturn Steps for figuring OID. Freestatetaxreturn   Figure the OID on a contingent payment debt instrument in two steps. Freestatetaxreturn Figure the OID using the constant yield method (discussed earlier under Debt Instruments Issued After 1984 ) that applies to fixed payment debt instruments. Freestatetaxreturn Use the comparable yield as the yield to maturity. Freestatetaxreturn 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). Freestatetaxreturn Do not treat any amount payable as qualified stated interest. Freestatetaxreturn Adjust the OID in (1) to account for actual contingent payments. Freestatetaxreturn If the contingent payment is greater than the projected fixed amount, you have a positive adjustment. Freestatetaxreturn If the contingent payment is less than the projected fixed amount, you have a negative adjustment. Freestatetaxreturn Net positive adjustment. Freestatetaxreturn   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. Freestatetaxreturn Treat a net positive adjustment as additional OID for the tax year. Freestatetaxreturn Net negative adjustment. Freestatetaxreturn   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. Freestatetaxreturn Use a net negative adjustment to offset OID on the debt instrument for the tax year. Freestatetaxreturn 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. Freestatetaxreturn 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. Freestatetaxreturn 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. Freestatetaxreturn Basis adjustments. Freestatetaxreturn   In general, increase your basis in a contingent payment debt instrument by the OID included in income. Freestatetaxreturn Your basis, however, is not affected by any negative or positive adjustments. Freestatetaxreturn Decrease your basis by any noncontingent payment received and the projected contingent payment scheduled to be received. Freestatetaxreturn Treatment of gain or loss on sale or exchange. Freestatetaxreturn   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. Freestatetaxreturn 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. Freestatetaxreturn If the debt instrument is a capital asset, treat any loss that is more than your prior OID accruals as a capital loss. Freestatetaxreturn See Regulations section 1. Freestatetaxreturn 1275-4 for exceptions to these rules. Freestatetaxreturn Premium, acquisition premium, and market discount. Freestatetaxreturn   The rules for accruing premium, acquisition premium, and market discount do not apply to a contingent payment debt instrument. Freestatetaxreturn See Regulations section 1. Freestatetaxreturn 1275-4 to determine how to account for these items. Freestatetaxreturn Inflation-Indexed Debt Instruments This discussion shows how you figure OID on certain inflation-indexed debt instruments issued after January 5, 1997. Freestatetaxreturn An inflation-indexed debt instrument is generally a debt instrument on which the payments are adjusted for inflation and d
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Freestatetaxreturn 3. Freestatetaxreturn   Claiming the Special Depreciation Allowance Table of Contents Introduction What Is Qualified Property?Qualified Reuse and Recycling Property Qualified Cellulosic Biofuel Plant Property Qualified Disaster Assistance Property Certain Qualified Property Acquired After December 31, 2007 Election to Accelerate Certain Credits in Lieu of the Special Depreciation Allowance How Much Can You Deduct? How Can You Elect Not To Claim an Allowance? When Must You Recapture an Allowance? Introduction You can take a special depreciation allowance to recover part of the cost of qualified property (defined next), placed in service during the tax year. Freestatetaxreturn The allowance applies only for the first year you place the property in service. Freestatetaxreturn For qualified property placed in service in 2013, you can take an additional 50% special allowance. Freestatetaxreturn The allowance is an additional deduction you can take after any section 179 deduction and before you figure regular depreciation under MACRS for the year you place the property in service. Freestatetaxreturn This chapter explains what is qualified property. Freestatetaxreturn It also includes rules regarding how to figure an allowance, how to elect not to claim an allowance, and when you must recapture an allowance. Freestatetaxreturn Corporations can elect to accelerate certain minimum tax credits in lieu of claiming the special depreciation allowance for eligible qualified property. Freestatetaxreturn See Election to Accelerate Certain Credits in Lieu of the Special Depreciation Allowance , later. Freestatetaxreturn See chapter 6 for information about getting publications and forms. Freestatetaxreturn What Is Qualified Property? Your property is qualified property if it is one of the following. Freestatetaxreturn Qualified reuse and recycling property. Freestatetaxreturn Qualified cellulosic biofuel plant property. Freestatetaxreturn Qualified disaster assistance property. Freestatetaxreturn Certain qualified property acquired after December 31, 2007. Freestatetaxreturn The following discussions provide information about the types of qualified property listed above for which you can take the special depreciation allowance. Freestatetaxreturn Qualified Reuse and Recycling Property You can take a 50% special depreciation allowance for qualified reuse and recycling property. Freestatetaxreturn Qualified reuse and recycling property is any machinery or equipment (not including buildings or real estate), along with any appurtenance, that is used exclusively to collect, distribute, or recycle qualified reuse and recyclable materials (as defined in section 168(m)(3)(B) of the Internal Revenue Code). Freestatetaxreturn Qualified reuse and recycling property also includes software necessary to operate such equipment. Freestatetaxreturn The property must meet the following requirements. Freestatetaxreturn The property must be depreciated under MACRS. Freestatetaxreturn The property must have a useful life of at least 5 years. Freestatetaxreturn The original use of the property must begin with you after August 31, 2008. Freestatetaxreturn You must have acquired the property by purchase (as discussed under Property Acquired by Purchase in chapter 2 ) after August 31, 2008, with no binding written contract for the acquisition in effect before September 1, 2008. Freestatetaxreturn The property must be placed in service for use in your trade or business after August 31, 2008. Freestatetaxreturn Excepted Property Qualified reuse and recycling property does not include any of the following. Freestatetaxreturn Any rolling stock or other equipment used to transport reuse or recyclable materials. Freestatetaxreturn Property required to be depreciated using the Alternative Depreciation System (ADS). Freestatetaxreturn For other property required to be depreciated using ADS, see Required use of ADS under Which Depreciation System (GDS or ADS) Applies , in chapter 4 . Freestatetaxreturn Other bonus depreciation property to which section 168(k) of the Internal Revenue Code applies. Freestatetaxreturn Property for which you elected not to claim any special depreciation allowance (discussed later). Freestatetaxreturn Property placed in service and disposed of in the same tax year. Freestatetaxreturn Property converted from business use to personal use in the same tax year acquired. Freestatetaxreturn Property converted from personal use to business use in the same or later tax year may be qualified reuse and recycling property. Freestatetaxreturn Qualified Cellulosic Biofuel Plant Property You can take a 50% special depreciation allowance for qualified cellulosic biofuel plant property. Freestatetaxreturn Cellulosic biofuel is any liquid fuel which is produced from any lignocellulosic or hemicellulosic matter that is available on a renewable or recurring basis. Freestatetaxreturn Examples include bagasse (from sugar cane), corn stalks, and switchgrass. Freestatetaxreturn The property must meet the following requirements. Freestatetaxreturn The property is used in the United States solely to produce cellulosic biofuel. Freestatetaxreturn The original use of the property must begin with you after December 20, 2006. Freestatetaxreturn You must have acquired the property by purchase (as discussed under Property Acquired by Purchase in chapter 2 ) after December 20, 2006, with no binding written contract for acquisition in effect before December 21, 2006. Freestatetaxreturn The property must be placed in service for use in your trade or business or for the production of income after October 3, 2008, and before January 3, 2013. Freestatetaxreturn Note. Freestatetaxreturn For property placed in service after January 2, 2013, and before January 1, 2014, you can take a 50% special depreciation allowance for qualified second generation biofuel plant property that is used solely in the United States to produce second generation biofuel (as defined in section 40(b)(6)(E)). Freestatetaxreturn The other requirements for qualified second generation biofuel plant property to be eligible for the special depreciation allowance are identical to the requirements discussed for Qualified Cellulosic Biofuel Plant Property above. Freestatetaxreturn Special Rules Sale-leaseback. Freestatetaxreturn   If you sold qualified cellulosic biofuel plant property you placed in service after October 3, 2008, and leased it back within 3 months after you originally placed it in service, the property is treated as originally placed in service no earlier than the date it is used by you under the leaseback. Freestatetaxreturn   The property will not qualify for the special allowance if the lessee or a related person to the lessee or lessor had a written binding contract in effect for the acquisition of the property before December 21, 2006. Freestatetaxreturn Syndicated leasing transactions. Freestatetaxreturn   If qualified cellulosic biofuel plant property is originally placed in service by a lessor after October 3, 2008, the property is sold within 3 months of the date it was placed in service, and the user of the property does not change, then the property is treated as originally placed in service by the taxpayer no earlier than the date of the last sale. Freestatetaxreturn   Multiple units of property subject to the same lease will be treated as originally placed in service no earlier than the date of sale if the property is sold within 3 months after the final unit is placed in service and the period between the times the first and last units are placed in service does not exceed 12 months. Freestatetaxreturn Excepted Property Qualified cellulosic biofuel plant property does not include any of the following. Freestatetaxreturn Property placed in service and disposed of in the same tax year. Freestatetaxreturn Property converted from business use to personal use in the same tax year it is acquired. Freestatetaxreturn Property converted from personal use to business use in the same or later tax year may be qualified cellulosic biomass ethanol plant property. Freestatetaxreturn Property required to be depreciated using the Alternative Depreciation System (ADS). Freestatetaxreturn For other property required to be depreciated using ADS, see Required use of ADS under Which Depreciation System (GDS or ADS) Applies , in chapter 4 . Freestatetaxreturn Property any portion of which is financed with the proceeds of any obligation the interest on which is exempt from tax under section 103 of the Internal Revenue Code. Freestatetaxreturn Property for which you elected not to claim any special depreciation allowance (discussed later). Freestatetaxreturn Property for which a deduction was taken under section 179C for certain qualified refinery property. Freestatetaxreturn Other bonus depreciation property to which section 168(k) of the Internal Revenue Code applies. Freestatetaxreturn Qualified Disaster Assistance Property You can take a 50% special depreciation allowance for qualified disaster assistance property placed in service in federally declared disaster areas in which the disaster occurred in 2009. Freestatetaxreturn A list of the federally declared disaster areas is available at the FEMA website at www. Freestatetaxreturn fema. Freestatetaxreturn gov. Freestatetaxreturn Your property is qualified disaster assistance property if it meets the following requirements. Freestatetaxreturn The property is nonresidential real property or residential real property placed in service before January 1, 2014, in a federally declared disaster area in which the disaster occurred in 2009. Freestatetaxreturn You must have acquired the property by purchase (as discussed under Property Acquired by Purchase in chapter 2 ) on or after the applicable disaster date, with no binding written contract for the acquisition in effect before the applicable disaster date. Freestatetaxreturn The property must rehabilitate property damaged, or replace property destroyed or condemned, as a result of the applicable federally declared disaster. Freestatetaxreturn The property must be similar in nature to, and located in the same county as, the rehabilitated or replaced property. Freestatetaxreturn The original use of the property within the applicable disaster area must have begun with you on or after the applicable disaster date. Freestatetaxreturn The property is placed in service by you on or before the date which is the last day of the fourth calendar year. Freestatetaxreturn Substantially all (80% or more) of the use of the property must be in the active conduct of your trade or business in a federally declared disaster area, occurring in 2009. Freestatetaxreturn It is not excepted property (explained later in Excepted Property ). Freestatetaxreturn Special Rules Sale-leaseback. Freestatetaxreturn   If you sold qualified disaster assistance property you placed in service after the applicable disaster date and leased it back within 3 months after you originally placed it in service, the property is treated as originally placed in service no earlier than the date it is used by you under the leaseback. Freestatetaxreturn   The property will not qualify for the special allowance if the lessee or a related person to the lessee or lessor had a written binding contract in effect for the acquisition of the property before the applicable disaster date. Freestatetaxreturn Syndicated leasing transactions. Freestatetaxreturn   If qualified disaster assistance property is originally placed in service by a lessor after the applicable disaster date, the property is sold within 3 months of the date it was placed in service, and the user of the property does not change, then the property is treated as originally placed in service by the taxpayer no earlier than the date of the last sale. Freestatetaxreturn   Multiple units of property subject to the same lease will be treated as originally placed in service no earlier than the date of sale if the property is sold within 3 months after the final unit is placed in service and the period between the times the first and last units are placed in service does not exceed 12 months. Freestatetaxreturn Excepted Property Qualified disaster assistance property does not include any of the following. Freestatetaxreturn Property required to be depreciated using the Alternative Depreciation System (ADS). Freestatetaxreturn For other property required to be depreciated using ADS, see Required use of ADS under Which Depreciation System (GDS or ADS) Applies , in chapter 4 . Freestatetaxreturn Property any portion of which is financed with the proceeds of a tax-exempt obligation under section 103 of the Internal Revenue Code. Freestatetaxreturn Any qualified revitalization building (defined later) placed in service before January 1, 2010, for which you have elected to claim a commercial revitalization deduction for qualified revitalization expenditures. Freestatetaxreturn Any property used in connection with any private or commercial golf course, country club, massage parlor, hot tub facility, suntan facility, or any store, the principal business of which is the sale of alcoholic beverages for consumption off premises. Freestatetaxreturn Any property for which the special allowance under section 168(k) or section 1400N(d) of the Internal Revenue Code applies. Freestatetaxreturn Property for which you elected not to claim any special depreciation allowance (discussed later). Freestatetaxreturn Property placed in service and disposed of in the same tax year. Freestatetaxreturn Property converted from business use to personal use in the same tax year acquired. Freestatetaxreturn Property converted from personal use to business use in the same or later tax year may be qualified disaster assistance property. Freestatetaxreturn Any gambling or animal racing property (defined later). Freestatetaxreturn Qualified revitalization building. Freestatetaxreturn   This is a commercial building and its structural components that you placed in service in a renewal community before January 1, 2010. Freestatetaxreturn If the building is new, the original use of the building must begin with you. Freestatetaxreturn If the building is not new, you must substantially rehabilitate the building and then place it in service. Freestatetaxreturn For more information, including definitions of substantially rehabilitated building and qualified revitalization expenditure, see section 1400I(b) of the Internal Revenue Code. Freestatetaxreturn Gambling or animal racing property. Freestatetaxreturn   Gambling or animal racing property includes the following personal and real property. Freestatetaxreturn Any equipment, furniture, software, or other property used directly in connection with gambling, the racing of animals, or the on-site viewing of such racing. Freestatetaxreturn Any real property determined by square footage (other than any portion that is less than 100 square feet) that is dedicated to gambling, the racing of animals, or the on-site viewing of such racing. Freestatetaxreturn Certain Qualified Property Acquired After December 31, 2007 You can take a 50% special depreciation deduction allowance for certain qualified property acquired after December 31, 2007. Freestatetaxreturn Your property is qualified property if it meets the following requirements. Freestatetaxreturn It is one of the following types of property. Freestatetaxreturn Tangible property depreciated under MACRS with a recovery period of 20 years or less. Freestatetaxreturn Water utility property. Freestatetaxreturn Computer software that is readily available for purchase by the general public, is subject to a nonexclusive license, and has not been substantially modified. Freestatetaxreturn (The cost of some computer software is treated as part of the cost of hardware and is depreciated under MACRS. Freestatetaxreturn ) Qualified leasehold improvement property (defined under Qualified leasehold improvement property later). Freestatetaxreturn You must have acquired the property after December 31, 2007, with no binding written contract for the acquisition in effect before January 1, 2008. Freestatetaxreturn The property must be placed in service for use in your trade or business or for the production of income before January 1, 2014 (before January 1, 2015, for certain property with a long production period and certain aircraft (defined next)). Freestatetaxreturn The original use of the property must begin with you after December 31, 2007. Freestatetaxreturn It is not excepted property (explained later in Excepted property). Freestatetaxreturn Qualified leasehold improvement property. Freestatetaxreturn    Generally, this is any improvement to an interior part of a building that is nonresidential real property, if all the following requirements are met. Freestatetaxreturn The improvement is made under or according to a lease by the lessee (or any sublessee) or the lessor of that part of the building. Freestatetaxreturn That part of the building is to be occupied exclusively by the lessee (or any sublessee) of that part. Freestatetaxreturn The improvement is placed in service more than 3 years after the date the building was first placed in service by any person. Freestatetaxreturn The improvement is section 1250 property. Freestatetaxreturn See chapter 3 in Publication 544, Sales and Other Dispositions of Assets, for the definition of section 1250 property. Freestatetaxreturn   However, a qualified leasehold improvement does not include any improvement for which the expenditure is attributable to any of the following. Freestatetaxreturn The enlargement of the building. Freestatetaxreturn Any elevator or escalator. Freestatetaxreturn Any structural component benefiting a common area. Freestatetaxreturn The internal structural framework of the building. Freestatetaxreturn   Generally, a binding commitment to enter into a lease is treated as a lease and the parties to the commitment are treated as the lessor and lessee. Freestatetaxreturn However, a lease between related persons is not treated as a lease. Freestatetaxreturn Related persons. Freestatetaxreturn   For this purpose, the following are related persons. Freestatetaxreturn Members of an affiliated group. Freestatetaxreturn An individual and a member of his or her family, including only a spouse, child, parent, brother, sister, half-brother, half-sister, ancestor, and lineal descendant. Freestatetaxreturn A corporation and an individual who directly or indirectly owns 80% or more of the value of the outstanding stock of that corporation. Freestatetaxreturn Two corporations that are members of the same controlled group. Freestatetaxreturn A trust fiduciary and a corporation if 80% or more of the value of the outstanding stock is directly or indirectly owned by or for the trust or grantor of the trust. Freestatetaxreturn The grantor and fiduciary, and the fiduciary and beneficiary, of any trust. Freestatetaxreturn The fiduciaries of two different trusts, and the fiduciaries and beneficiaries of two different trusts, if the same person is the grantor of both trusts. Freestatetaxreturn A tax-exempt educational or charitable organization and any person (or, if that person is an individual, a member of that person's family) who directly or indirectly controls the organization. Freestatetaxreturn Two S corporations, and an S corporation and a regular corporation, if the same persons own 80% or more of the value of the outstanding stock of each corporation. Freestatetaxreturn A corporation and a partnership if the same persons own both of the following. Freestatetaxreturn 80% or more of the value of the outstanding stock of the corporation. Freestatetaxreturn 80% or more of the capital or profits interest in the partnership. Freestatetaxreturn The executor and beneficiary of any estate. Freestatetaxreturn Long Production Period Property To be qualified property, long production period property must meet the following requirements. Freestatetaxreturn It must meet the requirements in (2)-(5), above. Freestatetaxreturn The property has a recovery period of at least 10 years or is transportation property. Freestatetaxreturn Transportation property is tangible personal property used in the trade or business of transporting persons or property. Freestatetaxreturn The property is subject to section 263A of the Internal Revenue Code. Freestatetaxreturn The property has an estimated production period exceeding 1 year and an estimated production cost exceeding $1,000,000. Freestatetaxreturn Noncommercial Aircraft To be qualified property, noncommercial aircraft must meet the following requirements. Freestatetaxreturn It must meet the requirements in (2)-(5), above. Freestatetaxreturn The aircraft must not be tangible personal property used in the trade or business of transporting persons or property (except for agricultural or firefighting purposes). Freestatetaxreturn The aircraft must be purchased (as discussed under Property Acquired by Purchase in chapter 2 ) by a purchaser who at the time of the contract for purchase, makes a nonrefundable deposit of the lesser of 10% of the cost or $100,000. Freestatetaxreturn The aircraft must have an estimated production period exceeding four months and a cost exceeding $200,000. Freestatetaxreturn Special Rules Sale-leaseback. Freestatetaxreturn   If you sold qualified property you placed in service after December 31, 2007, and leased it back within 3 months after you originally placed in service, the property is treated as originally placed in service no earlier than the date it is used by you under the leaseback. Freestatetaxreturn   The property will not qualify for the special depreciation allowance if the lessee or a related person to the lessee or lessor had a written binding contract in effect for the acquisition of the property before January 1, 2008. Freestatetaxreturn Syndicated leasing transactions. Freestatetaxreturn   If qualified property is originally placed in service by a lessor after December 31, 2007, the property is sold within 3 months of the date it was placed in service, and the user of the property does not change, then the property is treated as originally placed in service by the taxpayer no earlier than the date of the last sale. Freestatetaxreturn   Multiple units of property subject to the same lease will be treated as originally placed in service no earlier than the date of the last sale if the property is sold within 3 months after the final unit is placed in service and the period between the time the first and last units are placed in service does not exceed 12 months. Freestatetaxreturn Excepted Property Qualified property does not include any of the following. Freestatetaxreturn Property placed in service and disposed of in the same tax year. Freestatetaxreturn Property converted from business use to personal use in the same tax year acquired. Freestatetaxreturn Property converted from personal use to business use in the same or later tax year may be qualified property. Freestatetaxreturn Property required to be depreciated under the Alternative Depreciation System (ADS). Freestatetaxreturn This includes listed property used 50% or less in a qualified business use. Freestatetaxreturn For other property required to be depreciated using ADS, see Required use of ADS under Which Depreciation System (GDS or ADS) Applies , in chapter 4 . Freestatetaxreturn Qualified restaurant property (as defined in section 168(e)(7) of the Internal Revenue Code). Freestatetaxreturn Qualified retail improvement property (as defined in section 168(e)(8) of the Internal Revenue Code). Freestatetaxreturn Property for which you elected not to claim any special depreciation allowance (discussed later). Freestatetaxreturn Property for which you elected to accelerate certain credits in lieu of the special depreciation allowance (discussed next). Freestatetaxreturn Election to Accelerate Certain Credits in Lieu of the Special Depreciation Allowance An election made by a corporation to claim pre-2006 unused minimum tax credits in lieu of claiming the special depreciation allowance for either its first tax year ending after March 31, 2008, its first tax year ending after December 31, 2008, or its first tax year ending after December 31, 2010, continues to apply to round 2 extension property (as defined in section 168(k)(4)(I)(iv)), unless the corporation made an election not to apply the section 168(k)(4) election to round 2 extension property for its first tax year ending after December 31, 2010. Freestatetaxreturn For 2013, round 2 extension property generally is long production period and noncommercial aircraft if acquired after March 31, 2008, and placed in service after December 31, 2012, but before January 1, 2014. Freestatetaxreturn An election made by a corporation to claim pre-2006 unused minimum tax credits in lieu of claiming the special depreciation allowance for either its first tax year ending after March 31, 2008, its first tax year ending after December 31, 2008, or its first tax year ending after December 31, 2010, continues to apply to round 3 extension property (as defined in section 168(k)(4)(J)(iv)), unless the corporation makes an election not to apply the section 168(k)(4) election to round 3 extension property. Freestatetaxreturn If a corporation did not make a section 168(k)(4) election for either its first tax year ending after March 31, 2008, its first tax year ending after December 31, 2008, or its first tax year ending after December 31, 2010, the corporation may elect for its first tax year ending after December 31, 2012, to claim pre-2006 unused minimum tax credits in lieu of claiming the special depreciation allowance for only round 3 extension property. Freestatetaxreturn If you make an election to accelerate these credits in lieu of claiming the special depreciation allowance for eligible property, you must not take the 50% special depreciation allowance for the property and must depreciate the basis in the property under MACRS using the straight line method. Freestatetaxreturn See Which Depreciation Method Applies in chapter 4 . Freestatetaxreturn Once made, the election cannot be revoked without IRS consent. Freestatetaxreturn Additional guidance. Freestatetaxreturn   For additional guidance on the election to accelerate the research or minimum tax credit in lieu of claiming the special depreciation allowance, see Rev. Freestatetaxreturn Proc. Freestatetaxreturn 2008-65 on page 1082 of Internal Revenue Bulletin 2008-44, available at www. Freestatetaxreturn irs. Freestatetaxreturn gov/pub/irs-irbs/irb08-44. Freestatetaxreturn pdf, Rev. Freestatetaxreturn Proc. Freestatetaxreturn 2009-16 on page 449 of Internal Revenue Bulletin 2009-06, available at www. Freestatetaxreturn irs. Freestatetaxreturn gov/pub/irs-irbs/irb09-06. Freestatetaxreturn pdf, and Rev. Freestatetaxreturn Proc. Freestatetaxreturn 2009-33 on page 150 of Internal Revenue Bulletin 2009-29, available at www. Freestatetaxreturn irs. Freestatetaxreturn gov/pub/irs-irbs/irb09-29. Freestatetaxreturn pdf. Freestatetaxreturn Also, see Form 3800, General Business Credit; Form 8827, Credit for Prior Year Minimum Tax — Corporations; and related instructions. Freestatetaxreturn   Additional guidance regarding the election to accelerate the minimum tax credit in lieu of claiming the special depreciation allowance for round 2 extension property and round 3 extension property may also be available in later Internal Revenue Bulletins available at www. Freestatetaxreturn irs. Freestatetaxreturn gov/irb. Freestatetaxreturn How Much Can You Deduct? Figure the special depreciation allowance by multiplying the depreciable basis of qualified reuse and recycling property, qualified cellulosic biofuel plant property, qualified disaster assistance property, and certain qualified property acquired after December 31, 2007, by 50%. Freestatetaxreturn For qualified property other than listed property, enter the special allowance on line 14 in Part II of Form 4562. Freestatetaxreturn For qualified property that is listed property, enter the special allowance on line 25 in Part V of Form 4562. Freestatetaxreturn If you place qualified property in service in a short tax year, you can take the full amount of a special depreciation allowance. Freestatetaxreturn Depreciable basis. Freestatetaxreturn   This is the property's cost or other basis multiplied by the percentage of business/investment use, reduced by the total amount of any credits and deductions allocable to the property. Freestatetaxreturn   The following are examples of some credits and deductions that reduce depreciable basis. Freestatetaxreturn Any section 179 deduction. Freestatetaxreturn Any deduction for removal of barriers to the disabled and the elderly. Freestatetaxreturn Any disabled access credit, enhanced oil recovery credit, and credit for employer-provided childcare facilities and services. Freestatetaxreturn Basis adjustment to investment credit property under section 50(c) of the Internal Revenue Code. Freestatetaxreturn   For additional credits and deductions that affect basis, see section 1016 of the Internal Revenue Code. Freestatetaxreturn   For information about how to determine the cost or other basis of property, see What Is the Basis of Your Depreciable Property in chapter 1 . Freestatetaxreturn For a discussion of business/investment use, see Partial business or investment use under Property Used in Your Business or Income-Producing Activity in chapter 1 . Freestatetaxreturn Depreciating the remaining cost. Freestatetaxreturn   After you figure your special depreciation allowance for your qualified property, you can use the remaining cost to figure your regular MACRS depreciation deduction (discussed in chapter 4 . Freestatetaxreturn Therefore, you must reduce the depreciable basis of the property by the special depreciation allowance before figuring your regular MACRS depreciation deduction. Freestatetaxreturn Example. Freestatetaxreturn On November 1, 2013, Tom Brown bought and placed in service in his business qualified property that cost $450,000. Freestatetaxreturn He did not elect to claim a section 179 deduction. Freestatetaxreturn He deducts 50% of the cost ($225,000) as a special depreciation allowance for 2013. Freestatetaxreturn He uses the remaining $225,000 of cost to figure his regular MACRS depreciation deduction for 2013 and later years. Freestatetaxreturn Like-kind exchanges and involuntary conversions. Freestatetaxreturn   If you acquire qualified property in a like-kind exchange or involuntary conversion, the carryover basis of the acquired property is eligible for a special depreciation allowance. Freestatetaxreturn After you figure your special allowance, you can use the remaining carryover basis to figure your regular MACRS depreciation deduction. Freestatetaxreturn In the year you claim the allowance (the year you place in service the property received in the exchange or dispose of involuntarily converted property), you must reduce the carryover basis of the property by the allowance before figuring your regular MACRS depreciation deduction. Freestatetaxreturn See Figuring the Deduction for Property Acquired in a Nontaxable Exchange , in chapter 4 under How Is the Depreciation Deduction Figured . Freestatetaxreturn The excess basis (the part of the acquired property's basis that exceeds its carryover basis) is also eligible for a special depreciation allowance. Freestatetaxreturn How Can You Elect Not To Claim an Allowance? You can elect, for any class of property, not to deduct any special allowances for all property in such class placed in service during the tax year. Freestatetaxreturn To make an election, attach a statement to your return indicating what election you are making and the class of property for which you are making the election. Freestatetaxreturn When to make election. Freestatetaxreturn   Generally, you must make the election on a timely filed tax return (including extensions) for the year in which you place the property in service. Freestatetaxreturn   However, if you timely filed your return for the year without making the election, you can still make the election by filing an amended return within 6 months of the due date of the original return (not including extensions). Freestatetaxreturn Attach the election statement to the amended return. Freestatetaxreturn On the amended return, write “Filed pursuant to section 301. Freestatetaxreturn 9100-2. Freestatetaxreturn ” Revoking an election. Freestatetaxreturn   Once you elect not to deduct a special depreciation allowance for a class of property, you cannot revoke the election without IRS consent. Freestatetaxreturn A request to revoke the election is a request for a letter ruling. Freestatetaxreturn If you elect not to have any special allowance apply, the property may be subject to an alternative minimum tax adjustment for depreciation. Freestatetaxreturn When Must You Recapture an Allowance? When you dispose of property for which you claimed a special depreciation allowance, any gain on the disposition is generally recaptured (included in income) as ordinary income up to the amount of the special depreciation allowance previously allowed or allowable. Freestatetaxreturn See When Do You Recapture MACRS Depreciation in chapter 4 or more information. Freestatetaxreturn Recapture of allowance deducted for qualified GO Zone property. Freestatetaxreturn   If, in any year after the year you claim the special depreciation allowance for qualified GO Zone property (including specified GO Zone extension property), the property ceases to be used in the GO Zone, you may have to recapture as ordinary income the excess benefit you received from claiming the special depreciation allowance. Freestatetaxreturn For additional guidance, see Notice 2008-25 on page 484 of Internal Revenue Bulletin 2008-9. Freestatetaxreturn Qualified cellulosic biomass ethanol plant property and qualified cellulosic biofuel plant property. Freestatetaxreturn   If, in any year after the year you claim the special depreciation allowance for any qualified cellulosic biomass ethanol plant property or qualified biofuel plant property, the property ceases to be qualified cellulosic biomass ethanol plant property or qualified biofuel plant property, you may have to recapture as ordinary income the excess benefit you received from claiming the special depreciation allowance. Freestatetaxreturn Recapture of allowance for qualified Recovery Assistance property. Freestatetaxreturn   If, in any year after the year you claim the special depreciation allowance for qualified Recovery Assistance property, the property ceases to be used in the Kansas disaster area, you may have to recapture as ordinary income the excess benefit you received from claiming the special depreciation allowance. Freestatetaxreturn For additional guidance, see Notice 2008-67 on page 307 of Internal Revenue Bulletin 2008-32. Freestatetaxreturn Recapture of allowance for qualified disaster assistance property. Freestatetaxreturn   If, in any year after the year you claim the special depreciation allowance for qualified disaster assistance property, the property ceases to be used in the applicable disaster area, you may have to recapture as ordinary income the excess benefit you received from claiming the special depreciation allowance. Freestatetaxreturn   For additional guidance, see Notice 2008-67 on page 307 of Internal Revenue Bulletin 2008-32. Freestatetaxreturn Prev  Up  Next   Home   More Online Publications