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Tax Tips For 2012

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Tax Tips For 2012

Tax tips for 2012 4. Tax tips for 2012   Interest Table of Contents Introduction Topics - This chapter discusses: Useful Items - You may want to see: Allocation of InterestOrder of funds spent. Tax tips for 2012 Payments from checking accounts. Tax tips for 2012 Amounts paid within 30 days. Tax tips for 2012 Optional method for determining date of reallocation. Tax tips for 2012 Interest on a segregated account. Tax tips for 2012 How to report. Tax tips for 2012 Interest You Can DeductStatement. Tax tips for 2012 Expenses paid to obtain a mortgage. Tax tips for 2012 Prepayment penalty. Tax tips for 2012 De minimis OID. Tax tips for 2012 Constant-yield method. Tax tips for 2012 Loan or mortgage ends. Tax tips for 2012 Interest You Cannot DeductPenalties. Tax tips for 2012 Who is a key person? Exceptions for pre-June 1997 contracts. Tax tips for 2012 Interest allocated to unborrowed policy cash value. Tax tips for 2012 Capitalization of Interest When To Deduct InterestPrepaid interest. Tax tips for 2012 Discounted loan. Tax tips for 2012 Refunds of interest. Tax tips for 2012 Prepaid interest. Tax tips for 2012 Discounted loan. Tax tips for 2012 Tax deficiency. Tax tips for 2012 Related person. Tax tips for 2012 Below-Market LoansLimit on forgone interest for gift loans of $100,000 or less. Tax tips for 2012 Introduction This chapter discusses the tax treatment of business interest expense. Tax tips for 2012 Business interest expense is an amount charged for the use of money you borrowed for business activities. Tax tips for 2012 Topics - This chapter discusses: Allocation of interest Interest you can deduct Interest you cannot deduct Capitalization of interest When to deduct interest Below-market loans Useful Items - You may want to see: Publication 537 Installment Sales 550 Investment Income and Expenses 936 Home Mortgage Interest Deduction Form (and Instructions) Sch A (Form 1040) Itemized Deductions Sch E (Form 1040) Supplemental Income and Loss Sch K-1 (Form 1065) Partner's Share of Income, Deductions, Credits, etc. Tax tips for 2012 Sch K-1 (Form 1120S) Shareholder's Share of Income, Deductions, Credits, etc. Tax tips for 2012 1098 Mortgage Interest Statement 3115 Application for Change in Accounting Method 4952 Investment Interest Expense Deduction 8582 Passive Activity Loss Limitations See chapter 12 for information about getting publications and forms. Tax tips for 2012 Allocation of Interest The rules for deducting interest vary, depending on whether the loan proceeds are used for business, personal, or investment activities. Tax tips for 2012 If you use the proceeds of a loan for more than one type of expense, you must allocate the interest based on the use of the loan's proceeds. Tax tips for 2012 Allocate your interest expense to the following categories. Tax tips for 2012 Nonpassive trade or business activity interest Passive trade or business activity interest Investment interest Portfolio interest Personal interest In general, you allocate interest on a loan the same way you allocate the loan proceeds. Tax tips for 2012 You allocate loan proceeds by tracing disbursements to specific uses. Tax tips for 2012 The easiest way to trace disbursements to specific uses is to keep the proceeds of a particular loan separate from any other funds. Tax tips for 2012 Secured loan. Tax tips for 2012   The allocation of loan proceeds and the related interest is not generally affected by the use of property that secures the loan. Tax tips for 2012 Example. Tax tips for 2012 You secure a loan with property used in your business. Tax tips for 2012 You use the loan proceeds to buy an automobile for personal use. Tax tips for 2012 You must allocate interest expense on the loan to personal use (purchase of the automobile) even though the loan is secured by business property. Tax tips for 2012    If the property that secures the loan is your home, you generally do not allocate the loan proceeds or the related interest. Tax tips for 2012 The interest is usually deductible as qualified home mortgage interest, regardless of how the loan proceeds are used. Tax tips for 2012 For more information, see Publication 936. Tax tips for 2012 Allocation period. Tax tips for 2012   The period for which a loan is allocated to a particular use begins on the date the proceeds are used and ends on the earlier of the following dates. Tax tips for 2012 The date the loan is repaid. Tax tips for 2012 The date the loan is reallocated to another use. Tax tips for 2012 Proceeds not disbursed to borrower. Tax tips for 2012   Even if the lender disburses the loan proceeds to a third party, the allocation of the loan is still based on your use of the funds. Tax tips for 2012 This applies whether you pay for property, services, or anything else by incurring a loan, or you take property subject to a debt. Tax tips for 2012 Proceeds deposited in borrower's account. Tax tips for 2012   Treat loan proceeds deposited in an account as property held for investment. Tax tips for 2012 It does not matter whether the account pays interest. Tax tips for 2012 Any interest you pay on the loan is investment interest expense. Tax tips for 2012 If you withdraw the proceeds of the loan, you must reallocate the loan based on the use of the funds. Tax tips for 2012 Example. Tax tips for 2012 Celina, a calendar-year taxpayer, borrows $100,000 on January 4 and immediately uses the proceeds to open a checking account. Tax tips for 2012 No other amounts are deposited in the account during the year and no part of the loan principal is repaid during the year. Tax tips for 2012 On April 2, Celina uses $20,000 from the checking account for a passive activity expenditure. Tax tips for 2012 On September 4, Celina uses an additional $40,000 from the account for personal purposes. Tax tips for 2012 Under the interest allocation rules, the entire $100,000 loan is treated as property held for investment for the period from January 4 through April 1. Tax tips for 2012 From April 2 through September 3, Celina must treat $20,000 of the loan as used in the passive activity and $80,000 of the loan as property held for investment. Tax tips for 2012 From September 4 through December 31, she must treat $40,000 of the loan as used for personal purposes, $20,000 as used in the passive activity, and $40,000 as property held for investment. Tax tips for 2012 Order of funds spent. Tax tips for 2012   Generally, you treat loan proceeds deposited in an account as used (spent) before either of the following amounts. Tax tips for 2012 Any unborrowed amounts held in the same account. Tax tips for 2012 Any amounts deposited after these loan proceeds. Tax tips for 2012 Example. Tax tips for 2012 On January 9, Olena opened a checking account, depositing $500 of the proceeds of Loan A and $1,000 of unborrowed funds. Tax tips for 2012 The following table shows the transactions in her account during the tax year. Tax tips for 2012 Date Transaction January 9 $500 proceeds of Loan A and $1,000 unborrowed funds deposited January 14 $500 proceeds of Loan B  deposited February 19 $800 used for personal purposes February 27 $700 used for passive activity June 19 $1,000 proceeds of Loan C  deposited November 20 $800 used for an investment December 18 $600 used for personal purposes Olena treats the $800 used for personal purposes as made from the $500 proceeds of Loan A and $300 of the proceeds of Loan B. Tax tips for 2012 She treats the $700 used for a passive activity as made from the remaining $200 proceeds of Loan B and $500 of unborrowed funds. Tax tips for 2012 She treats the $800 used for an investment as made entirely from the proceeds of Loan C. Tax tips for 2012 She treats the $600 used for personal purposes as made from the remaining $200 proceeds of Loan C and $400 of unborrowed funds. Tax tips for 2012 For the periods during which loan proceeds are held in the account, Olena treats them as property held for investment. Tax tips for 2012 Payments from checking accounts. Tax tips for 2012   Generally, you treat a payment from a checking or similar account as made at the time the check is written if you mail or deliver it to the payee within a reasonable period after you write it. Tax tips for 2012 You can treat checks written on the same day as written in any order. Tax tips for 2012 Amounts paid within 30 days. Tax tips for 2012   If you receive loan proceeds in cash or if the loan proceeds are deposited in an account, you can treat any payment (up to the amount of the proceeds) made from any account you own, or from cash, as made from those proceeds. Tax tips for 2012 This applies to any payment made within 30 days before or after the proceeds are received in cash or deposited in your account. Tax tips for 2012   If the loan proceeds are deposited in an account, you can apply this rule even if the rules stated earlier under Order of funds spent would otherwise require you to treat the proceeds as used for other purposes. Tax tips for 2012 If you apply this rule to any payments, disregard those payments (and the proceeds from which they are made) when applying the rules stated under Order of funds spent. Tax tips for 2012   If you received the loan proceeds in cash, you can treat the payment as made on the date you received the cash instead of the date you actually made the payment. Tax tips for 2012 Example. Tax tips for 2012 Giovanni gets a loan of $1,000 on August 4 and receives the proceeds in cash. Tax tips for 2012 Giovanni deposits $1,500 in an account on August 18 and on August 28 writes a check on the account for a passive activity expense. Tax tips for 2012 Also, Giovanni deposits his paycheck, deposits other loan proceeds, and pays his bills during the same period. Tax tips for 2012 Regardless of these other transactions, Giovanni can treat $1,000 of the deposit he made on August 18 as being paid on August 4 from the loan proceeds. Tax tips for 2012 In addition, Giovanni can treat the passive activity expense he paid on August 28 as made from the $1,000 loan proceeds treated as deposited in the account. Tax tips for 2012 Optional method for determining date of reallocation. Tax tips for 2012   You can use the following method to determine the date loan proceeds are reallocated to another use. Tax tips for 2012 You can treat all payments from loan proceeds in the account during any month as taking place on the later of the following dates. Tax tips for 2012 The first day of that month. Tax tips for 2012 The date the loan proceeds are deposited in the account. Tax tips for 2012 However, you can use this optional method only if you treat all payments from the account during the same calendar month in the same way. Tax tips for 2012 Interest on a segregated account. Tax tips for 2012   If you have an account that contains only loan proceeds and interest earned on the account, you can treat any payment from that account as being made first from the interest. Tax tips for 2012 When the interest earned is used up, any remaining payments are from loan proceeds. Tax tips for 2012 Example. Tax tips for 2012 You borrowed $20,000 and used the proceeds of this loan to open a new savings account. Tax tips for 2012 When the account had earned interest of $867, you withdrew $20,000 for personal purposes. Tax tips for 2012 You can treat the withdrawal as coming first from the interest earned on the account, $867, and then from the loan proceeds, $19,133 ($20,000 − $867). Tax tips for 2012 All the interest charged on the loan from the time it was deposited in the account until the time of the withdrawal is investment interest expense. Tax tips for 2012 The interest charged on the part of the proceeds used for personal purposes ($19,133) from the time you withdrew it until you either repay it or reallocate it to another use is personal interest expense. Tax tips for 2012 The interest charged on the loan proceeds you left in the account ($867) continues to be investment interest expense until you either repay it or reallocate it to another use. Tax tips for 2012 Loan repayment. Tax tips for 2012   When you repay any part of a loan allocated to more than one use, treat it as being repaid in the following order. Tax tips for 2012 Personal use. Tax tips for 2012 Investments and passive activities (other than those included in (3)). Tax tips for 2012 Passive activities in connection with a rental real estate activity in which you actively participate. Tax tips for 2012 Former passive activities. Tax tips for 2012 Trade or business use and expenses for certain low-income housing projects. Tax tips for 2012 Line of credit (continuous borrowings). Tax tips for 2012   The following rules apply if you have a line of credit or similar arrangement. Tax tips for 2012 Treat all borrowed funds on which interest accrues at the same fixed or variable rate as a single loan. Tax tips for 2012 Treat borrowed funds or parts of borrowed funds on which interest accrues at different fixed or variable rates as different loans. Tax tips for 2012 Treat these loans as repaid in the order shown on the loan agreement. Tax tips for 2012 Loan refinancing. Tax tips for 2012   Allocate the replacement loan to the same uses to which the repaid loan was allocated. Tax tips for 2012 Make the allocation only to the extent you use the proceeds of the new loan to repay any part of the original loan. Tax tips for 2012 Debt-financed distribution. Tax tips for 2012   A debt-financed distribution occurs when a partnership or S corporation borrows funds and allocates those funds to distributions made to partners or shareholders. Tax tips for 2012 The manner in which you report the interest expense associated with the distributed debt proceeds depends on your use of those proceeds. Tax tips for 2012 How to report. Tax tips for 2012   If the proceeds were used in a nonpassive trade or business activity, report the interest on Schedule E (Form 1040), line 28; enter “interest expense” and the name of the partnership or S corporation in column (a) and the amount in column (h). Tax tips for 2012 If the proceeds were used in a passive activity, follow the Instructions for Form 8582, Passive Activity Loss Limitations, to determine the amount of interest expense that can be reported on Schedule E (Form 1040), line 28; enter “interest expense” and the name of the partnership in column (a) and the amount in column (f). Tax tips for 2012 If the proceeds were used in an investment activity, enter the interest on Form 4952. Tax tips for 2012 If the proceeds are used for personal purposes, the interest is generally not deductible. Tax tips for 2012 Interest You Can Deduct You can generally deduct as a business expense all interest you pay or accrue during the tax year on debts related to your trade or business. Tax tips for 2012 Interest relates to your trade or business if you use the proceeds of the loan for a trade or business expense. Tax tips for 2012 It does not matter what type of property secures the loan. Tax tips for 2012 You can deduct interest on a debt only if you meet all the following requirements. Tax tips for 2012 You are legally liable for that debt. Tax tips for 2012 Both you and the lender intend that the debt be repaid. Tax tips for 2012 You and the lender have a true debtor-creditor relationship. Tax tips for 2012 Partial liability. Tax tips for 2012   If you are liable for part of a business debt, you can deduct only your share of the total interest paid or accrued. Tax tips for 2012 Example. Tax tips for 2012 You and your brother borrow money. Tax tips for 2012 You are liable for 50% of the note. Tax tips for 2012 You use your half of the loan in your business, and you make one-half of the loan payments. Tax tips for 2012 You can deduct your half of the total interest payments as a business deduction. Tax tips for 2012 Mortgage. Tax tips for 2012   Generally, mortgage interest paid or accrued on real estate you own legally or equitably is deductible. Tax tips for 2012 However, rather than deducting the interest currently, you may have to add it to the cost basis of the property as explained later under Capitalization of Interest. Tax tips for 2012 Statement. Tax tips for 2012   If you paid $600 or more of mortgage interest (including certain points) during the year on any one mortgage, you generally will receive a Form 1098 or a similar statement. Tax tips for 2012 You will receive the statement if you pay interest to a person (including a financial institution or a cooperative housing corporation) in the course of that person's trade or business. Tax tips for 2012 A governmental unit is a person for purposes of furnishing the statement. Tax tips for 2012   If you receive a refund of interest you overpaid in an earlier year, this amount will be reported in box 3 of Form 1098. Tax tips for 2012 You cannot deduct this amount. Tax tips for 2012 For information on how to report this refund, see Refunds of interest, later in this chapter. Tax tips for 2012 Expenses paid to obtain a mortgage. Tax tips for 2012   Certain expenses you pay to obtain a mortgage cannot be deducted as interest. Tax tips for 2012 These expenses, which include mortgage commissions, abstract fees, and recording fees, are capital expenses. Tax tips for 2012 If the property mortgaged is business or income-producing property, you can amortize the costs over the life of the mortgage. Tax tips for 2012 Prepayment penalty. Tax tips for 2012   If you pay off your mortgage early and pay the lender a penalty for doing this, you can deduct the penalty as interest. Tax tips for 2012 Interest on employment tax deficiency. Tax tips for 2012   Interest charged on employment taxes assessed on your business is deductible. Tax tips for 2012 Original issue discount (OID). Tax tips for 2012   OID is a form of interest. Tax tips for 2012 A loan (mortgage or other debt) generally has OID when its proceeds are less than its principal amount. Tax tips for 2012 The OID is the difference between the stated redemption price at maturity and the issue price of the loan. Tax tips for 2012   A loan's stated redemption price at maturity is the sum of all amounts (principal and interest) payable on it other than qualified stated interest. Tax tips for 2012 Qualified stated interest is stated interest that is unconditionally payable in cash or property (other than another loan of the issuer) at least annually over the term of the loan at a single fixed rate. Tax tips for 2012 You generally deduct OID over the term of the loan. Tax tips for 2012 Figure the amount to deduct each year using the constant-yield method, unless the OID on the loan is de minimis. Tax tips for 2012 De minimis OID. Tax tips for 2012   The OID is de minimis if it is less than one-fourth of 1% (. Tax tips for 2012 0025) of the stated redemption price of the loan at maturity multiplied by the number of full years from the date of original issue to maturity (the term of the loan). Tax tips for 2012   If the OID is de minimis, you can choose one of the following ways to figure the amount you can deduct each year. Tax tips for 2012 On a constant-yield basis over the term of the loan. Tax tips for 2012 On a straight-line basis over the term of the loan. Tax tips for 2012 In proportion to stated interest payments. Tax tips for 2012 In its entirety at maturity of the loan. Tax tips for 2012 You make this choice by deducting the OID in a manner consistent with the method chosen on your timely filed tax return for the tax year in which the loan is issued. Tax tips for 2012 Example. Tax tips for 2012 On January 1, 2013, you took out a $100,000 discounted loan and received $98,500 in proceeds. Tax tips for 2012 The loan will mature on January 1, 2023 (a 10-year term), and the $100,000 principal is payable on that date. Tax tips for 2012 Interest of $10,000 is payable on January 1 of each year, beginning January 1, 2014. Tax tips for 2012 The $1,500 OID on the loan is de minimis because it is less than $2,500 ($100,000 × . Tax tips for 2012 0025 × 10). Tax tips for 2012 You choose to deduct the OID on a straight-line basis over the term of the loan. Tax tips for 2012 Beginning in 2013, you can deduct $150 each year for 10 years. Tax tips for 2012 Constant-yield method. Tax tips for 2012   If the OID is not de minimis, you must use the constant-yield method to figure how much you can deduct each year. Tax tips for 2012 You figure your deduction for the first year using the following steps. Tax tips for 2012 Determine the issue price of the loan. Tax tips for 2012 Generally, this equals the proceeds of the loan. Tax tips for 2012 If you paid points on the loan (as discussed later), the issue price generally is the difference between the proceeds and the points. Tax tips for 2012 Multiply the result in (1) by the yield to maturity. Tax tips for 2012 Subtract any qualified stated interest payments from the result in (2). Tax tips for 2012 This is the OID you can deduct in the first year. Tax tips for 2012   To figure your deduction in any subsequent year, follow the above steps, except determine the adjusted issue price in step (1). Tax tips for 2012 To get the adjusted issue price, add to the issue price any OID previously deducted. Tax tips for 2012 Then follow steps (2) and (3) above. Tax tips for 2012   The yield to maturity is generally shown in the literature you receive from your lender. Tax tips for 2012 If you do not have this information, consult your lender or tax advisor. Tax tips for 2012 In general, the yield to maturity is the discount rate that, when used in computing the present value of all principal and interest payments, produces an amount equal to the principal amount of the loan. Tax tips for 2012 Example. Tax tips for 2012 The facts are the same as in the previous example, except that you deduct the OID on a constant yield basis over the term of the loan. Tax tips for 2012 The yield to maturity on your loan is 10. Tax tips for 2012 2467%, compounded annually. Tax tips for 2012 For 2013, you can deduct $93 [($98,500 × . Tax tips for 2012 102467) − $10,000]. Tax tips for 2012 For 2014, you can deduct $103 [($98,593 × . Tax tips for 2012 102467) − $10,000]. Tax tips for 2012 Loan or mortgage ends. Tax tips for 2012   If your loan or mortgage ends, you may be able to deduct any remaining OID in the tax year in which the loan or mortgage ends. Tax tips for 2012 A loan or mortgage may end due to a refinancing, prepayment, foreclosure, or similar event. Tax tips for 2012 If you refinance with the original lender, you generally cannot deduct the remaining OID in the year in which the refinancing occurs, but you may be able to deduct it over the term of the new mortgage or loan. Tax tips for 2012 See Interest paid with funds borrowed from original lender under Interest You Cannot Deduct, later. Tax tips for 2012 Points. Tax tips for 2012   The term “points” is used to describe certain charges paid, or treated as paid, by a borrower to obtain a loan or a mortgage. Tax tips for 2012 These charges are also called loan origination fees, maximum loan charges, discount points, or premium charges. Tax tips for 2012 If any of these charges (points) are solely for the use of money, they are interest. Tax tips for 2012   Because points are prepaid interest, you generally cannot deduct the full amount in the year paid. Tax tips for 2012 However, you can choose to fully deduct points in the year paid if you meet certain tests. Tax tips for 2012 For exceptions to the general rule, see Publication 936. Tax tips for 2012 The points reduce the issue price of the loan and result in original issue discount (OID), deductible as explained in the preceding discussion. Tax tips for 2012 Partial payments on a nontax debt. Tax tips for 2012   If you make partial payments on a debt (other than a debt owed the IRS), the payments are applied, in general, first to interest and any remainder to principal. Tax tips for 2012 You can deduct only the interest. Tax tips for 2012 This rule does not apply when it can be inferred that the borrower and lender understood that a different allocation of the payments would be made. Tax tips for 2012 Installment purchase. Tax tips for 2012   If you make an installment purchase of business property, the contract between you and the seller generally provides for the payment of interest. Tax tips for 2012 If no interest or a low rate of interest is charged under the contract, a portion of the stated principal amount payable under the contract may be recharacterized as interest (unstated interest). Tax tips for 2012 The amount recharacterized as interest reduces your basis in the property and increases your interest expense. Tax tips for 2012 For more information on installment sales and unstated interest, see Publication 537. Tax tips for 2012 Interest You Cannot Deduct Certain interest payments cannot be deducted. Tax tips for 2012 In addition, certain other expenses that may seem to be interest but are not, cannot be deducted as interest. Tax tips for 2012 You cannot currently deduct interest that must be capitalized, and you generally cannot deduct personal interest. Tax tips for 2012 Interest paid with funds borrowed from original lender. Tax tips for 2012   If you use the cash method of accounting, you cannot deduct interest you pay with funds borrowed from the original lender through a second loan, an advance, or any other arrangement similar to a loan. Tax tips for 2012 You can deduct the interest expense once you start making payments on the new loan. Tax tips for 2012   When you make a payment on the new loan, you first apply the payment to interest and then to the principal. Tax tips for 2012 All amounts you apply to the interest on the first loan are deductible, along with any interest you pay on the second loan, subject to any limits that apply. Tax tips for 2012 Capitalized interest. Tax tips for 2012   You cannot currently deduct interest you are required to capitalize under the uniform capitalization rules. Tax tips for 2012 See Capitalization of Interest, later. Tax tips for 2012 In addition, if you buy property and pay interest owed by the seller (for example, by assuming the debt and any interest accrued on the property), you cannot deduct the interest. Tax tips for 2012 Add this interest to the basis of the property. Tax tips for 2012 Commitment fees or standby charges. Tax tips for 2012   Fees you incur to have business funds available on a standby basis, but not for the actual use of the funds, are not deductible as interest payments. Tax tips for 2012 You may be able to deduct them as business expenses. Tax tips for 2012   If the funds are for inventory or certain property used in your business, the fees are indirect costs and you generally must capitalize them under the uniform capitalization rules. Tax tips for 2012 See Capitalization of Interest, later. Tax tips for 2012 Interest on income tax. Tax tips for 2012   Interest charged on income tax assessed on your individual income tax return is not a business deduction even though the tax due is related to income from your trade or business. Tax tips for 2012 Treat this interest as a business deduction only in figuring a net operating loss deduction. Tax tips for 2012 Penalties. Tax tips for 2012   Penalties on underpaid deficiencies and underpaid estimated tax are not interest. Tax tips for 2012 You cannot deduct them. Tax tips for 2012 Generally, you cannot deduct any fines or penalties. Tax tips for 2012 Interest on loans with respect to life insurance policies. Tax tips for 2012   You generally cannot deduct interest on a debt incurred with respect to any life insurance, annuity, or endowment contract that covers any individual unless that individual is a key person. Tax tips for 2012   If the policy or contract covers a key person, you can deduct the interest on up to $50,000 of debt for that person. Tax tips for 2012 However, the deduction for any month cannot be more than the interest figured using Moody's Composite Yield on Seasoned Corporate Bonds (formerly known as Moody's Corporate Bond Yield Average-Monthly Average Corporates) (Moody's rate) for that month. Tax tips for 2012 Who is a key person?   A key person is an officer or 20% owner. Tax tips for 2012 However, the number of individuals you can treat as key persons is limited to the greater of the following. Tax tips for 2012 Five individuals. Tax tips for 2012 The lesser of 5% of the total officers and employees of the company or 20 individuals. Tax tips for 2012 Exceptions for pre-June 1997 contracts. Tax tips for 2012   You can generally deduct the interest if the contract was issued before June 9, 1997, and the covered individual is someone other than an employee, officer, or someone financially interested in your business. Tax tips for 2012 If the contract was purchased before June 21, 1986, you can generally deduct the interest no matter who is covered by the contract. Tax tips for 2012 Interest allocated to unborrowed policy cash value. Tax tips for 2012   Corporations and partnerships generally cannot deduct any interest expense allocable to unborrowed cash values of life insurance, annuity, or endowment contracts. Tax tips for 2012 This rule applies to contracts issued after June 8, 1997, that cover someone other than an officer, director, employee, or 20% owner. Tax tips for 2012 For more information, see section 264(f) of the Internal Revenue Code. Tax tips for 2012 Capitalization of Interest Under the uniform capitalization rules, you generally must capitalize interest on debt equal to your expenditures to produce real property or certain tangible personal property. Tax tips for 2012 The property must be produced by you for use in your trade or business or for sale to customers. Tax tips for 2012 You cannot capitalize interest related to property that you acquire in any other manner. Tax tips for 2012 Interest you paid or incurred during the production period must be capitalized if the property produced is designated property. Tax tips for 2012 Designated property is any of the following. Tax tips for 2012 Real property. Tax tips for 2012 Tangible personal property with a class life of 20 years or more. Tax tips for 2012 Tangible personal property with an estimated production period of more than 2 years. Tax tips for 2012 Tangible personal property with an estimated production period of more than 1 year if the estimated cost of production is more than $1 million. Tax tips for 2012 Property you produce. Tax tips for 2012   You produce property if you construct, build, install, manufacture, develop, improve, create, raise, or grow it. Tax tips for 2012 Treat property produced for you under a contract as produced by you up to the amount you pay or incur for the property. Tax tips for 2012 Carrying charges. Tax tips for 2012   Carrying charges include taxes you pay to carry or develop real estate or to carry, transport, or install personal property. Tax tips for 2012 You can choose to capitalize carrying charges not subject to the uniform capitalization rules if they are otherwise deductible. Tax tips for 2012 For more information, see chapter 7. Tax tips for 2012 Capitalized interest. Tax tips for 2012   Treat capitalized interest as a cost of the property produced. Tax tips for 2012 You recover your interest when you sell or use the property. Tax tips for 2012 If the property is inventory, recover capitalized interest through cost of goods sold. Tax tips for 2012 If the property is used in your trade or business, recover capitalized interest through an adjustment to basis, depreciation, amortization, or other method. Tax tips for 2012 Partnerships and S corporations. Tax tips for 2012   The interest capitalization rules are applied first at the partnership or S corporation level. Tax tips for 2012 The rules are then applied at the partners' or shareholders' level to the extent the partnership or S corporation has insufficient debt to support the production or construction costs. Tax tips for 2012   If you are a partner or a shareholder, you may have to capitalize interest you incur during the tax year for the production costs of the partnership or S corporation. Tax tips for 2012 You may also have to capitalize interest incurred by the partnership or S corporation for your own production costs. Tax tips for 2012 To properly capitalize interest under these rules, you must be given the required information in an attachment to the Schedule K-1 you receive from the partnership or S corporation. Tax tips for 2012 Additional information. Tax tips for 2012   The procedures for applying the uniform capitalization rules are beyond the scope of this publication. Tax tips for 2012 For more information, see sections 1. Tax tips for 2012 263A-8 through 1. Tax tips for 2012 263A-15 of the regulations and Notice 88-99. Tax tips for 2012 Notice 88-99 is in Cumulative Bulletin 1988-2. Tax tips for 2012 When To Deduct Interest If the uniform capitalization rules, discussed under Capitalization of Interest, earlier, do not apply to you, deduct interest as follows. Tax tips for 2012 Cash method. Tax tips for 2012   Under the cash method, you can generally deduct only the interest you actually paid during the tax year. Tax tips for 2012 You cannot deduct a promissory note you gave as payment because it is a promise to pay and not an actual payment. Tax tips for 2012 Prepaid interest. Tax tips for 2012   You generally cannot deduct any interest paid before the year it is due. Tax tips for 2012 Interest paid in advance can be deducted only in the tax year in which it is due. Tax tips for 2012 Discounted loan. Tax tips for 2012   If interest or a discount is subtracted from your loan proceeds, it is not a payment of interest and you cannot deduct it when you get the loan. Tax tips for 2012 For more information, see Original issue discount (OID) under Interest You Can Deduct, earlier. Tax tips for 2012 Refunds of interest. Tax tips for 2012   If you pay interest and then receive a refund in the same tax year of any part of the interest, reduce your interest deduction by the refund. Tax tips for 2012 If you receive the refund in a later tax year, include the refund in your income to the extent the deduction for the interest reduced your tax. Tax tips for 2012 Accrual method. Tax tips for 2012   Under an accrual method, you can deduct only interest that has accrued during the tax year. Tax tips for 2012 Prepaid interest. Tax tips for 2012   See Prepaid interest, earlier. Tax tips for 2012 Discounted loan. Tax tips for 2012   See Discounted loan, earlier. Tax tips for 2012 Tax deficiency. Tax tips for 2012   If you contest a federal income tax deficiency, interest does not accrue until the tax year the final determination of liability is made. Tax tips for 2012 If you do not contest the deficiency, then the interest accrues in the year the tax was asserted and agreed to by you. Tax tips for 2012   However, if you contest but pay the proposed tax deficiency and interest, and you do not designate the payment as a cash bond, then the interest is deductible in the year paid. Tax tips for 2012 Related person. Tax tips for 2012   If you use an accrual method, you cannot deduct interest owed to a related person who uses the cash method until payment is made and the interest is includible in the gross income of that person. Tax tips for 2012 The relationship is determined as of the end of the tax year for which the interest would otherwise be deductible. Tax tips for 2012 See section 267 of the Internal Revenue Code for more information. Tax tips for 2012 Below-Market Loans If you receive a below-market gift or demand loan and use the proceeds in your trade or business, you may be able to deduct the forgone interest. Tax tips for 2012 See Treatment of gift and demand loans, later, in this discussion. Tax tips for 2012 A below-market loan is a loan on which no interest is charged or on which interest is charged at a rate below the applicable federal rate. Tax tips for 2012 A gift or demand loan that is a below-market loan generally is considered an arm's-length transaction in which you, the borrower, are considered as having received both the following. Tax tips for 2012 A loan in exchange for a note that requires the payment of interest at the applicable federal rate. Tax tips for 2012 An additional payment in an amount equal to the forgone interest. Tax tips for 2012 The additional payment is treated as a gift, dividend, contribution to capital, payment of compensation, or other payment, depending on the substance of the transaction. Tax tips for 2012 Forgone interest. Tax tips for 2012   For any period, forgone interest is The interest that would be payable for that period if interest accrued on the loan at the applicable federal rate and was payable annually on December 31, minus Any interest actually payable on the loan for the period. Tax tips for 2012 Applicable federal rates are published by the IRS each month in the Internal Revenue Bulletin. Tax tips for 2012 Internal Revenue Bulletins are available on the IRS web site at www. Tax tips for 2012 irs. Tax tips for 2012 gov/irb. Tax tips for 2012 You can also contact an IRS office to get these rates. Tax tips for 2012 Loans subject to the rules. Tax tips for 2012   The rules for below-market loans apply to the following. Tax tips for 2012 Gift loans (below-market loans where the forgone interest is in the nature of a gift). Tax tips for 2012 Compensation-related loans (below-market loans between an employer and an employee or between an independent contractor and a person for whom the contractor provides services). Tax tips for 2012 Corporation-shareholder loans. Tax tips for 2012 Tax avoidance loans (below-market loans where the avoidance of federal tax is one of the main purposes of the interest arrangement). Tax tips for 2012 Loans to qualified continuing care facilities under a continuing care contract (made after October 11, 1985). Tax tips for 2012   Except as noted in (5) above, these rules apply to demand loans (loans payable in full at any time upon the lender's demand) outstanding after June 6, 1984, and to term loans (loans that are not demand loans) made after that date. Tax tips for 2012 Treatment of gift and demand loans. Tax tips for 2012   If you receive a below-market gift loan or demand loan, you are treated as receiving an additional payment (as a gift, dividend, etc. Tax tips for 2012 ) equal to the forgone interest on the loan. Tax tips for 2012 You are then treated as transferring this amount back to the lender as interest. Tax tips for 2012 These transfers are considered to occur annually, generally on December 31. Tax tips for 2012 If you use the loan proceeds in your trade or business, you can deduct the forgone interest each year as a business interest expense. Tax tips for 2012 The lender must report it as interest income. Tax tips for 2012 Limit on forgone interest for gift loans of $100,000 or less. Tax tips for 2012   For gift loans between individuals, forgone interest treated as transferred back to the lender is limited to the borrower's net investment income for the year. Tax tips for 2012 This limit applies if the outstanding loans between the lender and borrower total $100,000 or less. Tax tips for 2012 If the borrower's net investment income is $1,000 or less, it is treated as zero. Tax tips for 2012 This limit does not apply to a loan if the avoidance of any federal tax is one of the main purposes of the interest arrangement. Tax tips for 2012 Treatment of term loans. Tax tips for 2012   If you receive a below-market term loan other than a gift or demand loan, you are treated as receiving an additional cash payment (as a dividend, etc. Tax tips for 2012 ) on the date the loan is made. Tax tips for 2012 This payment is equal to the loan amount minus the present value, at the applicable federal rate, of all payments due under the loan. Tax tips for 2012 The same amount is treated as original issue discount on the loan. Tax tips for 2012 See Original issue discount (OID) under Interest You Can Deduct, earlier. Tax tips for 2012 Exceptions for loans of $10,000 or less. Tax tips for 2012   The rules for below-market loans do not apply to any day on which the total outstanding loans between the borrower and lender is $10,000 or less. Tax tips for 2012 This exception applies only to the following. Tax tips for 2012 Gift loans between individuals if the loan is not directly used to buy or carry income-producing assets. Tax tips for 2012 Compensation-related loans or corporation-shareholder loans if the avoidance of any federal tax is not a principal purpose of the interest arrangement. Tax tips for 2012 This exception does not apply to a term loan described in (2) above that was previously subject to the below-market loan rules. Tax tips for 2012 Those rules will continue to apply even if the outstanding balance is reduced to $10,000 or less. Tax tips for 2012 Exceptions for loans without significant tax effect. Tax tips for 2012   The following loans are specifically exempted from the rules for below-market loans because their interest arrangements do not have a significant effect on the federal tax liability of the borrower or the lender. Tax tips for 2012 Loans made available by lenders to the general public on the same terms and conditions that are consistent with the lender's customary business practices. Tax tips for 2012 Loans subsidized by a federal, state, or municipal government that are made available under a program of general application to the public. Tax tips for 2012 Certain employee-relocation loans. Tax tips for 2012 Certain loans to or from a foreign person, unless the interest income would be effectively connected with the conduct of a U. Tax tips for 2012 S. Tax tips for 2012 trade or business and not exempt from U. Tax tips for 2012 S. Tax tips for 2012 tax under an income tax treaty. Tax tips for 2012 Any other loan if the taxpayer can show that the interest arrangement has no significant effect on the federal tax liability of the lender or the borrower. Tax tips for 2012 Whether an interest arrangement has a significant effect on the federal tax liability of the lender or the borrower will be determined by all the facts and circumstances. Tax tips for 2012 Consider all the following factors. Tax tips for 2012 Whether items of income and deduction generated by the loan offset each other. Tax tips for 2012 The amount of the items. Tax tips for 2012 The cost of complying with the below-market loan provisions if they were to apply. Tax tips for 2012 Any reasons, other than taxes, for structuring the transaction as a below-market loan. Tax tips for 2012 Exception for loans to qualified continuing care facilities. Tax tips for 2012   The below-market interest rules do not apply to a loan owed by a qualified continuing care facility under a continuing care contract if the lender or lender's spouse is age 62 or older by the end of the calendar year. Tax tips for 2012 A qualified continuing care facility is one or more facilities (excluding nursing homes) meeting the requirements listed below. Tax tips for 2012 Designed to provide services under continuing care contracts (defined below). Tax tips for 2012 Includes an independent living unit, and either an assisted living or nursing facility, or both. Tax tips for 2012 Substantially all of the independent living unit residents are covered by continuing care contracts. Tax tips for 2012 A continuing care contract is a written contract between an individual and a qualified continuing care facility that includes all of the following conditions. Tax tips for 2012 The individual or individual's spouse must be entitled to use the facility for the rest of their life or lives. Tax tips for 2012 The individual or individual's spouse will be provided with housing, as appropriate for the health of the individual or individual's spouse in an: independent living unit (which has additional available facilities outside the unit for the provision of meals and other personal care), and assisted living or nursing facility available in the continuing care facility. Tax tips for 2012 The individual or individual's spouse will be provided with assisted living or nursing care available in the continuing care facility, as required for the health of the individual or the individual's spouse. Tax tips for 2012 For more information, see section 7872(h) of the Internal Revenue Code. Tax tips for 2012 Sale or exchange of property. Tax tips for 2012   Different rules generally apply to a loan connected with the sale or exchange of property. Tax tips for 2012 If the loan does not provide adequate stated interest, part of the principal payment may be considered interest. Tax tips for 2012 However, there are exceptions that may require you to apply the below-market interest rate rules to these loans. Tax tips for 2012 See Unstated Interest and Original Issue Discount (OID) in Publication 537. Tax tips for 2012 More information. Tax tips for 2012   For more information on below-market loans, see section 7872 of the Internal Revenue Code and section 1. Tax tips for 2012 7872-5 of the regulations. Tax tips for 2012 Prev  Up  Next   Home   More Online Publications
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Defense Finance and Accounting Services (DFAS)

The Defense Finance and Accounting Services oversees payments to Department of Defense servicemembers, employees, vendors and contractors. The Defense Finance and Accounting Services also provides Department of Defense decision makers with business intelligence, finance and accounting information.

Contact the Agency or Department

Website: Defense Finance and Accounting Services (DFAS)

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Phone Number: (703)607-2616

Toll-free: (888)332-7411

The Tax Tips For 2012

Tax tips for 2012 Publication 530 - Introductory Material Table of Contents What's New Reminders IntroductionOrdering forms and publications. Tax tips for 2012 Tax questions. Tax tips for 2012 Useful Items - You may want to see: What's New Simplified method for business use of home deduction. Tax tips for 2012  The IRS now provides a simplified method to determine your expenses for business use of your home. Tax tips for 2012 For more information, see the Instructions for Schedule C (Form 1040). Tax tips for 2012 Reminders Future developments. Tax tips for 2012  For the latest information about developments related to Publication 530, such as legislation enacted after it was published, go to www. Tax tips for 2012 irs. Tax tips for 2012 gov/pub530. Tax tips for 2012 Residential energy credits. Tax tips for 2012  You may be able to take a credit if you made energy saving improvements to your home located in the United States in 2013. Tax tips for 2012 See Form 5695, Residential Energy Credits, for more information. Tax tips for 2012 Home Affordable Modification Program (HAMP). Tax tips for 2012  If you benefit from Pay-for-Performance Success Payments, the payments are not taxable under HAMP. Tax tips for 2012 Hardest Hit Fund and Emergency Homeowners' Loan Programs. Tax tips for 2012  If you are a homeowner who received assistance under a State Housing Finance Agency Hardest Hit Fund program or an Emergency Homeowners' Loan Program, you may be able to deduct all of the payments you made on your mortgage during the year. Tax tips for 2012 For details, see Hardest Hit Fund and Emergency Homeowners' Loan Programs under What You Can and Cannot Deduct, later. Tax tips for 2012 Mortgage debt forgiveness. Tax tips for 2012  You can exclude from gross income any discharges of qualified principal residence indebtedness made after 2006 and before 2014. Tax tips for 2012 You must reduce the basis of your principal residence (but not below zero) by the amount you exclude. Tax tips for 2012 See Discharges of qualified principal residence indebtedness , later, and Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness (and Section 1082 Basis Adjustment), for more information. Tax tips for 2012 Repayment of first-time homebuyer credit. Tax tips for 2012  Generally, you must repay any credit you claimed for a home you bought if you disposed of the home or it ceased to be your main home in 2013. Tax tips for 2012 If you bought the home in 2008 and you owned and used it as your main home for all of 2013, you generally must continue repaying the credit with your 2013 tax return, but you do not have to attach Form 5405, Repayment of the First-Time Homebuyer Credit. Tax tips for 2012 See Form 5405 and its instructions for details and for exceptions to the repayment rule. Tax tips for 2012 Photographs of missing children. Tax tips for 2012  The Internal Revenue Service is a proud partner with the National Center for Missing and Exploited Children. Tax tips for 2012 Photographs of missing children selected by the Center may appear in this publication on pages that would otherwise be blank. Tax tips for 2012 You can help bring these children home by looking at the photographs and calling 1-800-THE-LOST (1-800-843-5678) if you recognize a child. Tax tips for 2012 Introduction This publication provides tax information for homeowners. Tax tips for 2012 Your home may be a house, condominium, cooperative apartment, mobile home, houseboat, or house trailer that contains sleeping space and toilet and cooking facilities. Tax tips for 2012 The following topics are explained. Tax tips for 2012 How you treat items such as settlement and closing costs, real estate taxes, sales taxes, home mortgage interest, and repairs. Tax tips for 2012 What you can and cannot deduct on your tax return. Tax tips for 2012 The tax credit you can claim if you received a mortgage credit certificate when you bought your home. Tax tips for 2012 Why you should keep track of adjustments to the basis of your home. Tax tips for 2012 (Your home's basis generally is what it cost; adjustments include the cost of any improvements you might make. Tax tips for 2012 ) What records you should keep as proof of the basis and adjusted basis. Tax tips for 2012 Comments and suggestions. Tax tips for 2012   We welcome your comments about this publication and your suggestions for future editions. Tax tips for 2012   You can write to us at the following address: Internal Revenue Service Tax Forms and Publications Division 1111 Constitution Ave. Tax tips for 2012 NW, IR-6526 Washington, DC 20224   We respond to many letters by telephone. Tax tips for 2012 Therefore, it would be helpful if you would include your daytime phone number, including the area code, in your correspondence. Tax tips for 2012   You can send your comments from www. Tax tips for 2012 irs. Tax tips for 2012 gov/formspubs/. Tax tips for 2012 Click on “More Information” and then on “Comment on Tax Forms and Publications”. Tax tips for 2012   Although we cannot respond individually to each comment received, we do appreciate your feedback and will consider your comments as we revise our tax products. Tax tips for 2012 Ordering forms and publications. Tax tips for 2012   Visit www. Tax tips for 2012 irs. Tax tips for 2012 gov/formspubs/ to download forms and publications, call 1-800-TAX-FORM (1-800-829-3676), or write to the address below and receive a response within 10 days after your request is received. Tax tips for 2012 Internal Revenue Service 1201 N. Tax tips for 2012 Mitsubishi Motorway Bloomington, IL 61705-6613 Tax questions. Tax tips for 2012   If you have a tax question, check the information available on IRS. Tax tips for 2012 gov or call 1-800-829-1040. Tax tips for 2012 We cannot answer tax questions sent to either of the above addresses. Tax tips for 2012 Useful Items - You may want to see: Publication 523 Selling Your Home 527 Residential Rental Property 547 Casualties, Disasters, and Thefts 551 Basis of Assets 555 Community Property 587 Business Use of Your Home 936 Home Mortgage Interest Deduction Form (and Instructions) 5405 Repayment of the First-Time Homebuyer Credit 5695 Residential Energy Credits 8396 Mortgage Interest Credit See How To Get Tax Help , near the end of this publication, for information about getting publications and forms. Tax tips for 2012 Prev  Up  Next   Home   More Online Publications