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Do state taxes 2. Do state taxes   Possession Source Income Table of Contents Types of IncomeCompensation for Labor or Personal Services Investment Income Sales or Other Dispositions of Property Scholarships, Fellowships, Grants, Prizes, and Awards Effectively Connected Income In order to determine where to file your return and which form(s) you need to complete, you must determine the source of each item of income you received during the tax year. Do state taxes Income you received from sources within, or that was effectively connected with the conduct of a trade or business within, the relevant possession must be identified separately from U. Do state taxes S. Do state taxes or foreign source income. Do state taxes This chapter discusses the rules for determining if the source of your income is from: American Samoa, The Commonwealth of the Northern Mariana Islands (CNMI), The Commonwealth of Puerto Rico (Puerto Rico), Guam, or The U. Do state taxes S. Do state taxes Virgin Islands (USVI). Do state taxes Generally, the same rules that apply for determining U. Do state taxes S. Do state taxes source income also apply for determining possession source income. Do state taxes However, there are some important exceptions to these rules. Do state taxes Both the general rules and the exceptions are discussed in this chapter. Do state taxes U. Do state taxes S. Do state taxes income rule. Do state taxes   This rule states that income is not possession source income if, under the rules of Internal Revenue Code sections 861–865, it is treated as income: From sources within the United States, or Effectively connected with the conduct of a trade or business within the United States. Do state taxes Table 2-1 shows the general rules for determining whether income is from sources within the United States. Do state taxes Table 2-1. Do state taxes General Rules for Determining U. Do state taxes S. Do state taxes Source of Income Item of Income Factor Determining Source Salaries, wages, and other compensation for labor or personal services Where labor or services performed Pensions Contributions: Where services were performed that earned the pension Investment earnings: Where pension trust is located Interest Residence of payer Dividends Where corporation created or organized Rents Location of property Royalties:   Natural resources Location of property Patents, copyrights, etc. Do state taxes Where property is used Sale of business inventory—purchased Where sold Sale of business inventory—produced Allocation if produced and sold in different locations Sale of real property Location of property Sale of personal property Seller's tax home (but see Special Rules for Gains From Dispositions of Certain Property , later, for exceptions) Sale of natural resources Allocation based on fair market value of product at export terminal. Do state taxes For more information, see Regulations section 1. Do state taxes 863-1(b). Do state taxes Types of Income This section looks at the most common types of income received by individuals, and the rules for determining the source of the income. Do state taxes Generally, the same rules shown in Table 2-1 are used to determine if you have possession source income. Do state taxes Compensation for Labor or Personal Services Income from labor or personal services includes wages, salaries, commissions, fees, per diem allowances, employee allowances and bonuses, and fringe benefits. Do state taxes It also includes income earned by sole proprietors and general partners from providing personal services in the course of their trade or business. Do state taxes Services performed wholly within a relevant possession. Do state taxes   Generally, all pay you receive for services performed in a relevant possession is considered to be from sources within that possession. Do state taxes However, there is an exception for income earned as a member of the U. Do state taxes S. Do state taxes Armed Forces or a civilian spouse. Do state taxes U. Do state taxes S. Do state taxes Armed Forces. Do state taxes   If you are a bona fide resident of a relevant possession, your military service pay will be sourced in that possession even if you perform the services in the United States or another possession. Do state taxes However, if you are not a bona fide resident of a possession, your military service pay will be income from the  United States even if you perform services in a possession. Do state taxes Civilian spouse of active duty member of the U. Do state taxes S. Do state taxes Armed Forces. Do state taxes   If you are a bona fide resident of a U. Do state taxes S. Do state taxes possession and choose to keep that possession as your tax residence under MSRRA when relocating with your servicemember spouse under military orders, the source of income for your labor or personal services is considered to be that possession. Do state taxes Likewise, if your tax residence is in one of the 50 states or the District of Columbia before relocating and you choose to keep it as your tax residence, the source of income for services performed in any of the U. Do state taxes S. Do state taxes possessions is considered to be the United States and, specifically, your state of residence or the District of Columbia. Do state taxes Services performed partly inside and partly outside a relevant possession. Do state taxes   If you are an employee and receive compensation for labor or personal services performed both inside and outside the relevant possession, special rules apply in determining the source of the compensation. Do state taxes Compensation (other than certain fringe benefits) is sourced on a time basis. Do state taxes Certain fringe benefits (such as housing and education) are sourced on a geographical basis. Do state taxes   Or, you may be permitted to use an alternative basis to determine the source of compensation. Do state taxes See Alternative basis , later. Do state taxes   If you are self-employed, determine the source of your income for labor or personal services from self-employment on the basis that most correctly reflects the proper source of that income under the facts and circumstances of your particular case. Do state taxes In many cases, the facts and circumstances will call for an apportionment on a time basis as explained next. Do state taxes Time basis. Do state taxes   Use a time basis to figure your compensation for labor or personal services from the relevant possession (other than the fringe benefits discussed later). Do state taxes Do this by multiplying your total compensation (other than the fringe benefits discussed later) by the following fraction:   Number of days you performed  services in the relevant  possession during the year     Total number of days you  performed services during the year           You can use a unit of time less than a day in the above fraction, if appropriate. Do state taxes The time period for which the income is made does not have to be a year. Do state taxes Instead, you can use another distinct, separate, and continuous time period if you can establish to the satisfaction of the IRS that this other period is more appropriate. Do state taxes Example. Do state taxes In 2013, you worked in your employer's office in the United States for 60 days and in the Puerto Rico office for 180 days, earning a total of $80,000 for the year. Do state taxes Your Puerto Rico source income is $60,000, figured as follows. Do state taxes       180 days 240 days × $80,000 = $60,000                 Multi-year compensation. Do state taxes   The source of multi-year compensation is generally determined on a time basis over the period to which the compensation is attributable. Do state taxes Multi-year compensation is compensation that is included in your income in 1 tax year but is attributable to a period that includes 2 or more tax years. Do state taxes You determine the period to which the income is attributable based on the facts and circumstances of your case. Do state taxes For more information on multi-year compensation, see Treasury Decision (T. Do state taxes D. Do state taxes ) 9212 and Regulations section 1. Do state taxes 861-4, 2005-35 I. Do state taxes R. Do state taxes B. Do state taxes 429, available at www. Do state taxes irs. Do state taxes gov/irb/2005-35_IRB/ar14. Do state taxes html. Do state taxes Certain fringe benefits sourced on a geographical basis. Do state taxes   If you received any of the following fringe benefits as compensation for labor or services performed as an employee partly inside and partly outside a relevant possession, you must source that income on a geographical basis. Do state taxes Housing. Do state taxes Education. Do state taxes Local transportation. Do state taxes Tax reimbursement. Do state taxes Hazardous or hardship duty pay. Do state taxes Moving expense reimbursement. Do state taxes For information on determining the source of the fringe benefits listed above, see Regulations section 1. Do state taxes 861-4. Do state taxes Alternative basis. Do state taxes   You can determine the source of your compensation under an alternative basis if you establish to the satisfaction of the IRS that, under the facts and circumstances of your case, the alternative basis more properly determines the source of your income than the time or geographical basis. Do state taxes If you use an alternative basis, you must keep (and have available for inspection) records to document why the alternative basis more properly determines the source of your income. Do state taxes De minimis exception. Do state taxes   There is an exception to the rule for determining the source of income earned in a possession. Do state taxes Generally, you will not have income from a possession if during a tax year you: Are a U. Do state taxes S. Do state taxes citizen or resident, Are not a bona fide resident of that possession, Are not employed by or under contract with an individual, partnership, or corporation that is engaged in a trade or business in that possession, Temporarily perform services in that possession for 90 days or less, and Earned $3,000 or less from such services. Do state taxes This exception began with income earned during your 2008 tax year. Do state taxes Pensions. Do state taxes   Generally, pension income has two components: contributions to the pension plan and the earnings accrued from investing those contributions. Do state taxes The contribution portion is sourced according to where services were performed that earned the pension. Do state taxes The investment earnings portion is sourced according to the location of the pension trust. Do state taxes Example. Do state taxes You are a U. Do state taxes S. Do state taxes citizen who worked in Puerto Rico for a U. Do state taxes S. Do state taxes company. Do state taxes All services were performed in Puerto Rico. Do state taxes Upon retirement you remained in Puerto Rico and began receiving your pension from the U. Do state taxes S. Do state taxes pension trust of your employer. Do state taxes Distributions from the U. Do state taxes S. Do state taxes pension trust must be allocated between (1) contributions, which are Puerto Rico source income, and (2) investment earnings, which are U. Do state taxes S. Do state taxes source income. Do state taxes Investment Income This category includes such income as interest, dividends, rents, and royalties. Do state taxes Interest income. Do state taxes   The source of interest income is generally determined by the residence of the payer. Do state taxes Interest paid by corporations created or organized in a relevant possession (possession corporation) or by individuals who are bona fide residents of a relevant possession is considered income from sources within that possession. Do state taxes   However, there is an exception to this rule if you are a bona fide resident of a relevant possession, receive interest from a corporation created or organized in that possession, and are a shareholder of that corporation who owns, directly or indirectly, at least 10% of the total voting stock of the corporation. Do state taxes See Regulations section 1. Do state taxes 937-2(i) for more information. Do state taxes Dividends. Do state taxes   Generally, dividends paid by a corporation created or organized in a relevant possession will be considered income from sources within that possession. Do state taxes There are additional rules for bona fide residents of a relevant possession who receive dividend income from possession corporations, and who own, directly or indirectly, at least 10% of the voting stock of the corporation. Do state taxes For more information, see Regulations section 1. Do state taxes 937-2(g). Do state taxes Rental income. Do state taxes   Rents from property located in a relevant possession are treated as income from sources within that possession. Do state taxes Royalties. Do state taxes   Royalties from natural resources located in a relevant possession are considered income from sources within that possession. Do state taxes   Also considered possession source income are royalties received for the use of, or for the privilege of using, in a relevant possession, patents, copyrights, secret processes and formulas, goodwill, trademarks, trade brands, franchises, and other like property. Do state taxes Sales or Other Dispositions of Property The source rules for sales or other dispositions of property are varied. Do state taxes The most common situations are discussed below. Do state taxes Real property. Do state taxes   Real property includes land and buildings, and generally anything built on, growing on, or attached to land. Do state taxes The location of the property generally determines the source of income from the sale. Do state taxes For example, if you are a bona fide resident of Guam and sell your home that is located in Guam, the gain on the sale is sourced in Guam. Do state taxes If, however, the home you sold was located in the United States, the gain is U. Do state taxes S. Do state taxes source income. Do state taxes Personal property. Do state taxes   The term “personal property” refers to property (such as machinery, equipment, or furniture) that is not real property. Do state taxes Generally, gain (or loss) from the sale or other disposition is sourced according to the seller's tax home. Do state taxes If personal property is sold by a bona fide resident of a relevant possession, the gain (or loss) from the sale is treated as sourced within that possession. Do state taxes   This rule does not apply to the sale of inventory, intangible property, depreciable personal property, or property sold through a foreign office or fixed place of business. Do state taxes The rules applying to sales of inventory are discussed below. Do state taxes For information on sales of the other types of property mentioned, see Internal Revenue Code section 865. Do state taxes Inventory. Do state taxes   Your inventory is personal property that is stock in trade or that is held primarily for sale to customers in the ordinary course of your trade or business. Do state taxes The source of income from the sale of inventory depends on whether the inventory was purchased or produced. Do state taxes Purchased. Do state taxes   Income from the sale of inventory that you purchased is sourced where you sell the property. Do state taxes Generally, this is where title to the property passes to the buyer. Do state taxes Produced. Do state taxes   Income from the sale of inventory that you produced in a relevant possession and sold outside that possession (or vice versa) is sourced based on an allocation. Do state taxes For information on making the allocation, see Regulations section 1. Do state taxes 863-3(f). Do state taxes Special Rules for Gains From Dispositions of Certain Property There are special rules for gains from dispositions of certain investment property (for example, stocks, bonds, debt instruments, diamonds, and gold) owned by a U. Do state taxes S. Do state taxes citizen or resident alien prior to becoming a bona fide resident of a possession. Do state taxes You are subject to these special rules if you meet both of the following conditions. Do state taxes For the tax year for which the source of the gain must be determined, you are a bona fide resident of the relevant possession. Do state taxes For any of the 10 years preceding that year, you were a citizen or resident alien of the United States (other than a bona fide resident of the relevant possession). Do state taxes If you meet these conditions, gains from the disposition of this property will not be treated as income from sources within the relevant possession for purposes of the Internal Revenue Code. Do state taxes Accordingly, bona fide residents of American Samoa and Puerto Rico, for example, may not exclude the gain on their U. Do state taxes S. Do state taxes tax return. Do state taxes (See chapter 3 for additional filing information. Do state taxes ) With respect to the CNMI, Guam, and the USVI, the gain from the disposition of this property will not meet the requirements for certain tax rules that may allow bona fide residents of those possessions to reduce or obtain a rebate of taxes on income from sources within the relevant possessions. Do state taxes These rules apply to dispositions after April 11, 2005. Do state taxes For details, see Regulations section 1. Do state taxes 937-2(f)(1) and Examples 1 and 2 of section 1. Do state taxes 937-2(k). Do state taxes Example 1. Do state taxes In 2007, Cheryl Jones, a U. Do state taxes S. Do state taxes citizen, lived in the United States and paid $1,000 for 100 shares of stock in the Rose Corporation, a U. Do state taxes S. Do state taxes corporation listed on the New York Stock Exchange. Do state taxes On March 1, 2010, she moved to Puerto Rico and changed her tax home to Puerto Rico on the same date. Do state taxes Cheryl satisfied the presence test in 2010 and, under the year-of-move exception, she was considered a bona fide resident of Puerto Rico for the rest of 2010. Do state taxes On March 1, 2010, the closing value of Cheryl's stock in the Rose Corporation was $2,000. Do state taxes On January 5, 2013, while still a bona fide resident of Puerto Rico, Cheryl sold all her Rose Corporation stock for $7,000. Do state taxes Under the earlier rules, none of Cheryl's $6,000 gain will be treated as income from sources within Puerto Rico. Do state taxes The source rules discussed in the preceding paragraphs supplement, and may apply in conjunction with, an existing special rule. Do state taxes This existing special rule applies if you are a U. Do state taxes S. Do state taxes citizen or resident alien who becomes a bona fide resident of American Samoa, the CNMI, or Guam, and who has gain from the disposition of certain U. Do state taxes S. Do state taxes assets during the 10-year period beginning when you became a bona fide resident. Do state taxes The gain is U. Do state taxes S. Do state taxes source income that generally is subject to U. Do state taxes S. Do state taxes tax if the property is either (1) located in the United States; (2) stock issued by a U. Do state taxes S. Do state taxes corporation or a debt obligation of a U. Do state taxes S. Do state taxes person or of the United States, a state (or political subdivision), or the District of Columbia; or (3) property that has a basis in whole or in part by reference to property described in (1) or (2). Do state taxes See chapter 3 for filing information. Do state taxes Special election. Do state taxes   For dispositions after April 11, 2005, you can choose to treat the part of gain (or loss) attributable to the time you held the property while a bona fide resident of the relevant possession (the possession holding period) as gain (or loss) from sources within that possession. Do state taxes Make the election by reporting the gain attributable to the possession holding period on your income tax return for the year of disposition. Do state taxes This election overrides both of the special rules discussed earlier. Do state taxes   There are two methods for figuring the gain for the possession holding period, one for marketable securities and another for other types of investment property. Do state taxes Marketable securities. Do state taxes   Marketable securities are those actively traded on an established financial market, such as stock in a publicly held corporation. Do state taxes Under the special election, allocate the gain (or loss) by figuring the appreciation separately for your possession and U. Do state taxes S. Do state taxes holding periods. Do state taxes   Your possession holding period begins on the first day you do not have a tax home outside the relevant possession. Do state taxes The gain (or loss) attributable to the possession holding period is the difference in fair market value of the security at the close of the market on the first and last days of this holding period. Do state taxes This is your gain (or loss) that is treated as being from sources within the relevant possession. Do state taxes If you were a bona fide resident of the relevant possession for more than one continuous period, combine the gains (or losses) from each possession holding period. Do state taxes Example 2. Do state taxes Assume the same facts as in Example 1, except that Cheryl makes the special election to allocate the gain between her U. Do state taxes S. Do state taxes and possession holding periods. Do state taxes Cheryl's possession holding period began March 1, 2010, the date her tax home changed to Puerto Rico. Do state taxes Therefore, the portion of gain attributable to her possession holding period is $5,000 ($7,000 sale price – $2,000 closing value on first day of the possession holding period). Do state taxes By reporting $5,000 of her $6,000 gain as Puerto Rico source income on her 2013 Puerto Rico tax return (and the remainder as non-Puerto Rico source income), Cheryl elects to treat that amount as Puerto Rico source income. Do state taxes Other personal property. Do state taxes   For personal property other than marketable securities, use a time-based allocation. Do state taxes Figure the gain (or loss) attributable to the possession holding period by multiplying your total gain (or loss) by the following fraction. Do state taxes      Number of days in the  possession holding period     Total number of days  in your holding period         The result is your gain (or loss) that is treated as being from sources within the relevant possession. Do state taxes Example 3. Do state taxes In addition to the stock in Rose Corporation, Cheryl acquired a 5% interest in the Alder Partnership on January 1, 2009. Do state taxes On March 1, 2010, when she established bona fide residency in Puerto Rico, her partnership interest was not considered a marketable security. Do state taxes On September 16, 2013, while still a bona fide resident of Puerto Rico, Cheryl sold her interest in Alder Partnership for a $100,000 gain. Do state taxes She had owned the interest for a total of 1,720 days. Do state taxes Cheryl's possession holding period (from March 1, 2010, through September 16, 2013) is 1,296 days. Do state taxes The portion of her gain attributable to Puerto Rico is $75,349 ($100,000 x (1,296 Puerto Rico days ÷ 1,720 total days)). Do state taxes By reporting $75,349 of her $100,000 gain as Puerto Rico source income on her 2013 Puerto Rico tax return (and the remainder as non-Puerto Rico source income), Cheryl elects to treat that amount as Puerto Rico source income. Do state taxes Scholarships, Fellowships, Grants, Prizes, and Awards The source of these types of income is generally the residence of the payer, regardless of who actually disburses the funds. Do state taxes Therefore, in order to be possession source income, the payer must be a resident of the relevant possession, such as an individual who is a bona fide resident or a corporation created or organized in that possession. Do state taxes These rules do not apply to amounts paid as salary or other compensation for services. Do state taxes See Compensation for Labor or Personal Services, earlier in this chapter, for the source rules that apply. Do state taxes Effectively Connected Income In limited circumstances, some kinds of income from sources outside the relevant possession must be treated as effectively connected with a trade or business in that possession. Do state taxes These circumstances are listed below. Do state taxes You have an office or other fixed place of business in the relevant possession to which the income can be attributed. Do state taxes That office or place of business is a material factor in producing the income. Do state taxes The income is produced in the ordinary course of the trade or business carried on through that office or other fixed place of business. Do state taxes An office or other fixed place of business is a material factor if it significantly contributes to, and is an essential economic element in, the earning of the income. Do state taxes The three kinds of income from sources outside the relevant possession to which these rules apply are the following. Do state taxes Rents and royalties for the use of, or for the privilege of using, intangible personal property located outside the relevant possession or from any interest in such property. Do state taxes Included are rents or royalties for the use of, or for the privilege of using, outside the relevant possession, patents, copyrights, secret processes and formulas, goodwill, trademarks, trade brands, franchises, and similar properties if the rents or royalties are from the active conduct of a trade or business in the relevant possession. Do state taxes Dividends or interest from the active conduct of a banking, financing, or similar business in the relevant possession. Do state taxes Income, gain, or loss from the sale or exchange outside the relevant possession, through the office or other fixed place of business in the relevant possession, of: Stock in trade, Property that would be included in inventory if on hand at the end of the tax year, or Property held primarily for sale to customers in the ordinary course of business. Do state taxes Item (3) will not apply if you sold the property for use, consumption, or disposition outside the relevant possession and an office or other fixed place of business in a foreign country was a material factor in the sale. Do state taxes Example. Do state taxes Marcy Jackson is a bona fide resident of American Samoa. Do state taxes Her business, which she conducts from an office in American Samoa, is developing and selling specialized computer software. Do state taxes A software purchaser will frequently pay Marcy an additional amount to install the software on the purchaser's operating system and to ensure that the software is functioning properly. Do state taxes Marcy installs the software at the purchaser's place of business, which may be in American Samoa, in the United States, or in another country. Do state taxes The income from selling the software is effectively connected with the conduct of Marcy's business in American Samoa, even though the product's destination may be outside the possession. Do state taxes However, the compensation she receives for installing the software (personal services) outside of American Samoa is not effectively connected with the conduct of her business in the possession—the income is sourced where she performs the services. Do state taxes Prev  Up  Next   Home   More Online Publications
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Do state taxes 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. Do state taxes Adjustment for premium. Do state taxes Adjustment for acquisition premium. Do state taxes Adjustment for market discount. Do state taxes 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. Do state taxes “Original issue discount” is defined first. Do state taxes The other terms are listed alphabetically. Do state taxes Original issue discount (OID). Do state taxes   OID is a form of interest. Do state taxes 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). Do state taxes Zero coupon bonds and debt instruments that pay no stated interest until maturity are examples of debt instruments that have OID. Do state taxes Accrual period. Do state taxes   An accrual period is an interval of time used to measure OID. Do state taxes The length of an accrual period can be 6 months, a year, or some other period, depending on when the debt instrument was issued. Do state taxes Acquisition premium. Do state taxes   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. Do state taxes A debt instrument does not have acquisition premium, however, if the debt instrument was purchased at a premium. Do state taxes See Premium, later. Do state taxes Adjusted issue price. Do state taxes   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. Do state taxes In general, the adjusted issue price at the beginning of the debt instrument's first accrual period is its issue price. Do state taxes 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. Do state taxes Debt instrument. Do state taxes   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). Do state taxes It generally does not include an annuity contract. Do state taxes Issue price. Do state taxes   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. Do state taxes Market discount. Do state taxes   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. Do state taxes 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. Do state taxes The market discount is the difference between the issue price plus accrued OID and your adjusted basis. Do state taxes Premium. Do state taxes   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. Do state taxes The premium is the excess of the adjusted basis over the payable amounts. Do state taxes See Publication 550 for information on the tax treatment of bond premium. Do state taxes Qualified stated interest. Do state taxes   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. Do state taxes Stated redemption price at maturity. Do state taxes   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. Do state taxes Yield to maturity (YTM). Do state taxes   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. Do state taxes The YTM is generally shown on the face of the debt instrument or in the literature you receive from your broker. Do state taxes If you do not have this information, consult your broker, tax advisor, or the issuer. Do state taxes 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. Do state taxes 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. Do state taxes The OID amounts listed are figured without reference to the price or date at which you acquired the debt instrument. Do state taxes 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. Do state taxes The following discussions explain what information is contained in each section of the list. Do state taxes Section I. Do state taxes   This section contains publicly offered, long-term debt instruments. Do state taxes Section I-A: Corporate Debt Instruments Issued Before 1985. Do state taxes Section I-B: Corporate Debt Instruments Issued After 1984. Do state taxes Section I-C: Inflation-Indexed Debt Instruments. Do state taxes For each publicly offered debt instrument in Section I, the list contains the following information. Do state taxes The name of the issuer. Do state taxes The Committee on Uniform Security Identification Procedures (CUSIP) number. Do state taxes The issue date. Do state taxes The maturity date. Do state taxes The issue price expressed as a percent of principal or of stated redemption price at maturity. Do state taxes The annual stated or coupon interest rate. Do state taxes (This rate is shown as 0. Do state taxes 00 if no annual interest payments are provided. Do state taxes ) The yield to maturity will be added to Section I-B for bonds issued after December 31, 2006. Do state taxes The total OID accrued up to January 1 of a calendar year. Do state taxes (This information is not available for every instrument. Do state taxes ) 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. Do state taxes The total OID per $1,000 of principal or maturity value for a calendar year and a subsequent year. Do state taxes Section II. Do state taxes   This section contains stripped coupons and principal components of U. Do state taxes S. Do state taxes Treasury and Government-Sponsored Enterprise debt instruments. Do state taxes 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. Do state taxes This section also includes debt instruments backed by U. Do state taxes S. Do state taxes Treasury securities that represent ownership interests in those securities. Do state taxes   The obligations listed in Section II are arranged by maturity date. Do state taxes The amounts listed are the total OID for a calendar year per $1,000 of redemption price. Do state taxes Section III. Do state taxes   This section contains short-term discount obligations. Do state taxes Section III-A: Short-Term U. Do state taxes S. Do state taxes Treasury Bills. Do state taxes Section III-B: Federal Home Loan Banks. Do state taxes Section III-C: Federal National Mortgage Association. Do state taxes Section III-D: Federal Farm Credit Banks. Do state taxes Section III-E: Federal Home Loan Mortgage Corporation. Do state taxes Section III-F: Federal Agricultural Mortgage Corporation. Do state taxes    Information that supplements Section III-A is available on the Internet at http://www. Do state taxes treasurydirect. Do state taxes gov/tdhome. Do state taxes htm. Do state taxes   The short-term obligations listed in this section are arranged by maturity date. Do state taxes 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. Do state taxes 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. Do state taxes Debt Instruments Not on the OID List The list of debt instruments discussed earlier does not contain the following items. Do state taxes U. Do state taxes S. Do state taxes savings bonds. Do state taxes Certificates of deposit and other face-amount certificates issued at a discount, including syndicated certificates of deposit. Do state taxes Obligations issued by tax-exempt organizations. Do state taxes OID debt instruments that matured or were entirely called by the issuer before the tables were posted on the IRS website. Do state taxes Mortgage-backed securities and mortgage participation certificates. Do state taxes Long-term OID debt instruments issued before May 28, 1969. Do state taxes Short-term obligations, other than the obligations listed in Section III. Do state taxes Debt instruments issued at a discount by states or their political subdivisions. Do state taxes REMIC regular interests and CDOs. Do state taxes Commercial paper and banker's acceptances issued at a discount. Do state taxes Obligations issued at a discount by individuals. Do state taxes Foreign obligations not traded in the United States and obligations not issued in the United States. Do state taxes 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. Do state taxes 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. Do state taxes 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. Do state taxes See Backup Withholding, later. Do state taxes 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. Do state taxes 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). Do state taxes Electronic payee statements. Do state taxes   You can issue Form 1099-OID electronically with the consent of the recipient. Do state taxes More information. Do state taxes   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. Do state taxes 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. Do state taxes 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. Do state taxes If you sell the obligation for the owner before maturity, you must file Form 1099-B to reflect the gross proceeds to the seller. Do state taxes Do not report the accrued discount to the date of sale on either Form 1099-INT or Form 1099-OID. Do state taxes 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. Do state taxes A special rule is used to determine the original issue price for information reporting on U. Do state taxes S. Do state taxes Treasury bills (T-bills) listed in Section III-A. Do state taxes 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. Do state taxes This noncompetitive discount price is the issue price (expressed as a percent of principal) shown in Section III-A. Do state taxes 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. Do state taxes Example 1. Do state taxes There are 13-week and 26-week T-bills maturing on the same date as the T-bill being redeemed. Do state taxes The price actually paid by the owner cannot be established by owner or middleman records. Do state taxes 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. Do state taxes The interest you report on Form 1099-INT is the OID (per $1,000 of principal) shown in Section III-A for that obligation. Do state taxes 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. Do state taxes For this purpose, you can rely on Section I of the OID list to determine the following information. Do state taxes Whether a debt instrument has OID. Do state taxes The OID to be reported on the Form 1099-OID. Do state taxes In general, you must report OID on publicly offered, long-term debt instruments listed in Section I. Do state taxes You also can report OID on other long-term debt instruments. Do state taxes Form 1099-OID. Do state taxes   On Form 1099-OID for a calendar year show the following information. Do state taxes Box 1. Do state taxes The OID for the actual dates the owner held the debt instruments during a calendar year. Do state taxes To determine this amount, see Figuring OID, next. Do state taxes Box 2. Do state taxes The qualified stated interest paid or credited during the calendar year. Do state taxes Interest reported here is not reported on Form 1099-INT. Do state taxes The qualified stated interest on Treasury inflation-protected securities may be reported on Form 1099-INT in box 3 instead. Do state taxes Box 3. Do state taxes Any interest or principal forfeited because of an early withdrawal that the owner can deduct from gross income. Do state taxes Do not reduce the amounts in boxes 1 and 2 by the forfeiture. Do state taxes Box 4. Do state taxes Any backup withholding for this debt instrument. Do state taxes Box 7. Do state taxes The CUSIP number, if any. Do state taxes 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. Do state taxes 50 2006). Do state taxes If the issuer of the debt instrument is other than the payer, show the name of the issuer in this box. Do state taxes Box 8. Do state taxes The OID on a U. Do state taxes S. Do state taxes Treasury obligation for the part of the year the owner held the debt instrument. Do state taxes Box 9. Do state taxes Investment expenses passed on to holders of a single-class REMIC. Do state taxes Boxes 10-12. Do state taxes Use to report any state income tax withheld for this debt instrument. Do state taxes Figuring OID. Do state taxes   You can determine the OID on a long-term debt instrument by using either of the following. Do state taxes Section I of the OID list. Do state taxes The income tax regulations. Do state taxes Using Section I. Do state taxes   If the owner held the debt instrument for the entire calendar year, report the OID shown in Section I for the calendar year. Do state taxes 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. Do state taxes For example, if the debt instrument's stated redemption price at maturity is $500, report one-half the listed OID. Do state taxes   If the owner held the debt instrument for less than the entire calendar year, figure the OID to report as follows. Do state taxes Look up the daily OID for the first accrual period in the calendar year during which the owner held the debt instrument. Do state taxes Multiply the daily OID by the number of days the owner held the debt instrument during that accrual period. Do state taxes Repeat steps (1) and (2) for any remaining accrual periods for the year during which the owner held the debt instrument. Do state taxes Add the results in steps (2) and (3) to determine the owner's OID per $1,000 of stated redemption price at maturity. Do state taxes If necessary, adjust the OID in (4) to reflect the debt instrument's stated redemption price at maturity. Do state taxes Report the result on Form 1099-OID in box 1. Do state taxes Using the income tax regulations. Do state taxes   Instead of using Section I to figure OID, you can use the regulations under sections 1272 through 1275 of the Internal Revenue Code. Do state taxes 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. Do state taxes (If you use Section I-B, the OID is figured using 6-month accrual periods. Do state taxes )   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. Do state taxes 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. Do state taxes You must file an information return showing the reportable interest and OID, if any, on the CD. Do state taxes These rules apply whether or not you sold the CD to the owner. Do state taxes Report OID on a CD in the same way as OID on other debt instruments. Do state taxes See Short-Term Obligations Redeemed at Maturity and Long-Term Debt Instruments, earlier. Do state taxes 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. Do state taxes However, do not report the interest if either of the following apply. Do state taxes You hold the bond as a nominee for the true owner. Do state taxes The payee is a foreign person. Do state taxes See Payments to foreign person under Backup Withholding, later. Do state taxes 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. Do state taxes The coupon may have been “stripped” (separated) from the bond and separately purchased. Do state taxes 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. Do state taxes 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%. Do state taxes The backup withholding is deducted at the time a cash payment is made. Do state taxes See Pub. Do state taxes 1281, Backup Withholding for Missing and Incorrect Name/TIN(s), for more information. Do state taxes Backup withholding generally applies in the following situations. Do state taxes The payee does not give you a taxpayer identification number (TIN). Do state taxes The IRS notifies you that the payee gave an incorrect TIN. Do state taxes The IRS notifies you that the payee is subject to backup withholding due to payee underreporting. Do state taxes 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. Do state taxes However, for short-term discount obligations (other than government obligations), bearer bonds and coupons, and U. Do state taxes S. Do state taxes 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. Do state taxes Short-term obligations. Do state taxes   Backup withholding applies to OID on a short-term obligation only when the OID is paid at maturity. Do state taxes However, backup withholding applies to any interest payable before maturity when the interest is paid or credited. Do state taxes   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. Do state taxes 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. Do state taxes If the purchase price of a listed obligation is not established or is disregarded, you must use the issue price shown in Section III. Do state taxes Long-term obligations. Do state taxes   If no cash payments are made on a long-term obligation before maturity, backup withholding applies only at maturity. Do state taxes The amount subject to backup withholding is the OID includible in the owner's gross income for the calendar year when the obligation matures. Do state taxes The amount to be withheld is limited to the cash paid. Do state taxes Registered long-term obligations with cash payments. Do state taxes   If a registered long-term obligation has cash payments before maturity, backup withholding applies when a cash payment is made. Do state taxes 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. Do state taxes 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. Do state taxes For any payment, the required withholding is limited to the cash paid. Do state taxes Payee not the original owner. Do state taxes   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). Do state taxes The amount subject to backup withholding at maturity of a listed obligation must be determined using the issue price shown in Section I. Do state taxes Bearer long-term obligations with cash payments. Do state taxes   If a bearer long-term obligation has cash payments before maturity, backup withholding applies when the cash payments are made. Do state taxes 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. Do state taxes 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. Do state taxes The required withholding at maturity is limited to the cash paid. Do state taxes Sales and redemptions. Do state taxes   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. Do state taxes Backup withholding applies in the following situations. Do state taxes The payee does not give you a TIN. Do state taxes The IRS notifies you that the payee gave an incorrect TIN. Do state taxes 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. Do state taxes Payments outside the United States to U. Do state taxes S. Do state taxes person. Do state taxes   The requirements for backup withholding and information reporting apply to payments of OID and interest made outside the United States to a U. Do state taxes S. Do state taxes 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. Do state taxes S. Do state taxes trade or business. Do state taxes Payments to foreign person. Do state taxes   The following discussions explain the rules for backup withholding and information reporting on payments to foreign persons. Do state taxes U. Do state taxes S. Do state taxes -source amount. Do state taxes   Backup withholding and information reporting are not required for payments of U. Do state taxes S. Do state taxes -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. Do state taxes A U. Do state taxes S. Do state taxes resident is not a foreign person. Do state taxes 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. Do state taxes 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. Do state taxes S. Do state taxes person. Do state taxes   For information about the 28% withholding tax that may apply to payments of U. Do state taxes S. Do state taxes -source OID or interest to foreign persons, see Publication 515. Do state taxes Foreign-source amount. Do state taxes   Backup withholding and information reporting are not required for payments of foreign-source OID and interest made outside the United States. Do state taxes 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. Do state taxes More information. Do state taxes   For more information about backup withholding and information reporting on foreign-source amounts or payments to foreign persons, see Regulations section 1. Do state taxes 6049-5. Do state taxes Information for Owners of OID Debt Instruments This section is for persons who prepare their own tax returns. Do state taxes It discusses the income tax rules for figuring and reporting OID on long-term debt instruments. Do state taxes 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. Do state taxes However, the information provided does not cover every situation. Do state taxes More information can be found in the regulations under sections 1271 through 1275 of the Internal Revenue Code. Do state taxes Including OID in income. Do state taxes   Generally, you include OID in income as it accrues each year, whether or not you receive any payments from the debt instrument issuer. Do state taxes Exceptions. Do state taxes   The rules for including OID in income as it accrues generally do not apply to the following debt instruments. Do state taxes U. Do state taxes S. Do state taxes savings bonds. Do state taxes Tax-exempt obligations. Do state taxes (However, see Tax-Exempt Bonds and Coupons, later. Do state taxes ) Obligations issued by individuals before March 2, 1984. Do state taxes Loans of $10,000 or less between individuals who are not in the business of lending money. Do state taxes (The dollar limit includes outstanding prior loans by the lender to the borrower. Do state taxes ) This exception does not apply if a principal purpose of the loan is to avoid any federal tax. Do state taxes   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. Do state taxes Publication 550 also discusses rules for holders of REMIC interests and CDOs. Do state taxes De minimis rule. Do state taxes   You can treat OID as zero if the total OID on a debt instrument is less than one-fourth of 1% (. Do state taxes 0025) of the stated redemption price at maturity multiplied by the number of full years from the date of original issue to maturity. Do state taxes Debt instruments with de minimis OID are not listed in this publication. Do state taxes 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. Do state taxes Also, the de minimis rules generally do not apply to tax-exempt obligations. Do state taxes Example 2. Do state taxes 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. Do state taxes 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. Do state taxes Under the de minimis rule, you can treat the OID as zero because the $20 discount is less than $25. Do state taxes Example 3. Do state taxes Assume the same facts as Example 2, except the debt instrument was issued at $950. Do state taxes You must report part of the $50 OID each year because it is more than $25. Do state taxes Choice to report all interest as OID. Do state taxes   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. Do state taxes See Constant yield method under Debt Instruments Issued After 1984, later, for more information. Do state taxes   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. Do state taxes For more information, see Regulations section 1. Do state taxes 1272-3. Do state taxes Purchase after date of original issue. Do state taxes   A debt instrument you purchased after the date of original issue may have premium, acquisition premium, or market discount. Do state taxes If so, the OID reported to you on Form 1099-OID may have to be adjusted. Do state taxes For more information, see Showing an OID adjustment under How To Report OID, later. Do state taxes The following rules generally do not apply to contingent payment debt instruments. Do state taxes Adjustment for premium. Do state taxes   If your debt instrument (other than an inflation-indexed debt instrument) has premium, do not report any OID as ordinary income. Do state taxes Your adjustment is the total OID shown on your Form 1099-OID. Do state taxes Adjustment for acquisition premium. Do state taxes   If your debt instrument has acquisition premium, reduce the OID you report. Do state taxes 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. Do state taxes Adjustment for market discount. Do state taxes   If your debt instrument has market discount that you choose to include in income currently, increase the OID you report. Do state taxes Your adjustment is the accrued market discount for the year. Do state taxes 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. Do state taxes If you choose to use the constant yield method to figure accrued market discount, also see Figuring OID on Long-Term Debt Instruments, later. Do state taxes The constant yield method of figuring accrued OID, explained in those discussions under Constant yield method, is also used to figure accrued market discount. Do state taxes For more information concerning premium or market discount on an inflation-indexed debt instrument, see Regulations section 1. Do state taxes 1275-7. Do state taxes Sale, exchange, or redemption. Do state taxes   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. Do state taxes If you sold the debt instrument through a broker, you should receive Form 1099-B or an equivalent statement from the broker. Do state taxes Use the Form 1099-B or other statement and your brokerage statements to complete Form 8949, and Schedule D (Form 1040). Do state taxes   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. Do state taxes Your basis, generally, is your cost increased by the OID you have included in income each year you held it. Do state taxes 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. Do state taxes   See chapter 4 of Publication 550 for more information about the tax treatment of the sale or redemption of discounted debt instruments. Do state taxes Example 4. Do state taxes Larry, a calendar year taxpayer, bought a corporate debt instrument at original issue for $86,235. Do state taxes 00 on November 1 of Year 1. Do state taxes The 15-year debt instrument matures on October 31 of Year 16 at a stated redemption price of $100,000. Do state taxes The debt instrument provides for semiannual payments of interest at 10%. Do state taxes Assume the debt instrument is a capital asset in Larry's hands. Do state taxes The debt instrument has $13,765. Do state taxes 00 of OID ($100,000 stated redemption price at maturity minus $86,235. Do state taxes 00 issue price). Do state taxes Larry sold the debt instrument for $90,000 on November 1 of Year 4. Do state taxes Including the OID he will report for the period he held the debt instrument in Year 4, Larry has included $4,556. Do state taxes 00 of OID in income and has increased his basis by that amount to $90,791. Do state taxes 00. Do state taxes Larry has realized a loss of $791. Do state taxes 00. Do state taxes All of Larry's loss is capital loss. Do state taxes 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. Do state taxes Form 1099-OID shows all OID income in box 1 except OID on a U. Do state taxes S. Do state taxes Treasury obligation, which is shown in box 8. Do state taxes It also shows, in box 2, any qualified stated interest you must include in income. Do state taxes (However, any qualified stated interest on Treasury inflation-protected securities can be reported on Form 1099-INT in box 3. Do state taxes ) A copy of Form 1099-OID will be sent to the IRS. Do state taxes Do not attach your copy to your tax return. Do state taxes Keep it for your records. Do state taxes 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. Do state taxes 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. Do state taxes Form 1099-OID not received. Do state taxes   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. Do state taxes Refiguring OID. Do state taxes   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. Do state taxes You bought the debt instrument at a premium or at an acquisition premium. Do state taxes The debt instrument is a stripped bond or coupon (including zero coupon bonds backed by U. Do state taxes S. Do state taxes Treasury securities). Do state taxes The debt instrument is a contingent payment or inflation-indexed debt instrument. Do state taxes See the discussions under Figuring OID on Long-Term Debt Instruments or Figuring OID on Stripped Bonds and Coupons, later, for the specific computations. Do state taxes Refiguring interest. Do state taxes   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. Do state taxes Nominee. Do state taxes   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. Do state taxes ” You must file another Form 1099-OID for each actual owner, showing the OID for the owner. Do state taxes Show the owner of the debt instrument as the “recipient” and you as the “payer. Do state taxes ”   Complete Form 1099-OID and Form 1096 and file the forms with the Internal Revenue Service Center for your area. Do state taxes You must also give a copy of the Form 1099-OID to the actual owner. Do state taxes However, you are not required to file a nominee return to show amounts belonging to your spouse. Do state taxes See the Form 1099 instructions for more information. Do state taxes   When preparing your tax return, follow the instructions under Showing an OID adjustment in the next discussion. Do state taxes 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. Do state taxes Form 1040 or Form 1040A required. Do state taxes   You must use Form 1040 or Form 1040A (you cannot use Form 1040EZ) under either of the following conditions. Do state taxes You received a Form 1099-OID as a nominee for the actual owner. Do state taxes Your total interest and OID income for the year was more than $1,500. Do state taxes Form 1040 required. Do state taxes   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. Do state taxes 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. Do state taxes Also, you must use Form 1040 if you were charged an early withdrawal penalty. Do state taxes Where to report. Do state taxes   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. Do state taxes Include all OID and periodic interest shown on any Form 1099-OID, boxes 1, 2, and 8, you received for the tax year. Do state taxes Also include any other OID and interest income for which you did not receive a Form 1099. Do state taxes Showing an OID adjustment. Do state taxes   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. Do state taxes   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. Do state taxes If the OID, as adjusted, is less than the amount shown on Form 1099-OID, show the adjustment as follows. Do state taxes Under your last entry on line 1, subtotal all interest and OID income listed on line 1. Do state taxes Below the subtotal, write “Nominee Distribution” or “OID Adjustment” and show the OID you are not required to report. Do state taxes Subtract that OID from the subtotal and enter the result on line 2. Do state taxes If the OID, as adjusted, is more than the amount shown on Form 1099-OID, show the adjustment as follows. Do state taxes Under your last entry on line 1, subtotal all interest and OID income listed on line 1. Do state taxes Below the subtotal, write “OID Adjustment” and show the additional OID. Do state taxes Add that OID to the subtotal and enter the result on line 2. Do state taxes 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. Do state taxes It also may depend on the type of the debt instrument. Do state taxes There are different rules for each of the following debt instruments. Do state taxes Corporate debt instruments issued after 1954 and before May 28, 1969, and government debt instruments issued after 1954 and before July 2, 1982. Do state taxes Corporate debt instruments issued after May 27, 1969, and before July 2, 1982. Do state taxes Debt instruments issued after July 1, 1982, and before 1985. Do state taxes Debt instruments issued after 1984 (other than debt instruments described in (5) and (6)). Do state taxes Contingent payment debt instruments issued after August 12, 1996. Do state taxes Inflation-indexed debt instruments (including Treasury inflation-protected securities) issued after January 5, 1997. Do state taxes Zero coupon bonds. Do state taxes   The rules for figuring OID on zero coupon bonds backed by U. Do state taxes S. Do state taxes Treasury securities are discussed under Figuring OID on Stripped Bonds and Coupons, later. Do state taxes 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. Do state taxes The OID, which is taxed as ordinary income, generally equals the following amount. Do state taxes   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. Do state taxes If there is a loss on the sale of the debt instrument, the entire loss is a capital loss and no OID is reported. Do state taxes 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. Do state taxes For information about showing the correct OID on your tax return, see the discussion under How To Report OID, earlier. Do state taxes Your basis in the debt instrument is increased by the OID you include in income. Do state taxes Form 1099-OID. Do state taxes   You should receive a Form 1099-OID showing OID for the part of the year you held the debt instrument. Do state taxes However, if you paid an acquisition premium, you may need to refigure the OID to report on your tax return. Do state taxes See Reduction for acquisition premium, later. Do state taxes 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. Do state taxes irs. Do state taxes gov/pub1212 by clicking the link under Recent Developments. Do state taxes Form 1099-OID not received. Do state taxes    The OID listed is for each $1,000 of redemption price. Do state taxes You must adjust the listed amount if your debt instrument has a different principal amount. Do state taxes For example, if you have a debt instrument with a $500 principal amount, use one-half the listed amount to figure your OID. Do state taxes   If you held the debt instrument the entire year, use the OID shown in Section I-A for a calendar year. Do state taxes (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. Do state taxes ) If you did not hold the debt instrument the entire year, figure your OID using the following method. Do state taxes Divide the OID shown by 12. Do state taxes 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. Do state taxes This is the OID to include in income unless you paid an acquisition premium. Do state taxes The reduction for acquisition premium is discussed next. Do state taxes Reduction for acquisition premium. Do state taxes   If you bought the debt instrument at an acquisition premium, figure the OID to include in income as follows. Do state taxes 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. Do state taxes This is the monthly OID. Do state taxes Subtract from your cost the issue price and the accumulated OID from the date of issue to the date of purchase. Do state taxes (If the result is zero or less, stop here. Do state taxes You did not pay an acquisition premium. Do state taxes ) 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. Do state taxes Subtract the amount figured in (3) from the amount figured in (1). Do state taxes This is the OID to include in income for each month you hold the debt instrument during the year. Do state taxes Transfers during the month. Do state taxes   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. Do state taxes Your holding period for this purpose begins the day you acquire the debt instrument and ends the day before you dispose of it. Do state taxes 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. Do state taxes For information about showing the correct OID on your tax return, see How To Report OID, earlier. Do state taxes Form 1099-OID. Do state taxes   You should receive a Form 1099-OID showing OID for the part of the year you held the debt instrument. Do state taxes However, if you paid an acquisition premium, you may need to refigure the OID to report on your tax return. Do state taxes See Constant yield method and the discussions on acquisition premium that follow, later. Do state taxes 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. Do state taxes irs. Do state taxes gov/pub1212 by clicking the link under Recent Developments. Do state taxes Form 1099-OID not received. Do state taxes    The OID listed is for each $1,000 of redemption price. Do state taxes You must adjust the listed amount if your debt instrument has a different principal amount. Do state taxes For example, if you have a debt instrument with a $500 principal amount, use one-half the listed amount to figure your OID. Do state taxes   If you held the debt instrument the entire year, use the OID shown in Section I-A. Do state taxes (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. Do state taxes ) If you did not hold the debt instrument the entire year, figure your OID using either of the following methods. Do state taxes Method 1. Do state taxes    Divide the total OID for a calendar year by 365 (366 for leap years). Do state taxes Multiply the result in (1) by the number of days you held the debt instrument during that particular year. Do state taxes  This computation is an approximation and may result in a slightly higher OID than Method 2. Do state taxes Method 2. Do state taxes    Look up the daily OID for the first accrual period you held the debt instrument during a calendar year. Do state taxes (See Accrual period under Constant yield method, next. Do state taxes ) Multiply the daily OID by the number of days you held the debt instrument during that accrual period. Do state taxes If you held the debt instrument for part of both accrual periods, repeat (1) and (2) for the second accrual period. Do state taxes Add the results of (2) and (3). Do state taxes This is the OID to include in income, unless you paid an acquisition premium. Do state taxes (The reduction for acquisition premium is discussed later. Do state taxes ) Constant yield method. Do state taxes   This discussion shows how to figure OID on debt instruments issued after July 1, 1982, and before 1985, using a constant yield method. Do state taxes OID is allocated over the life of the debt instrument through adjustments to the issue price for each accrual period. Do state taxes   Figure the OID allocable to any accrual period as follows. Do state taxes Multiply the adjusted issue price at the beginning of the accrual period by the debt instrument's yield to maturity. Do state taxes Subtract from the result in (1) any qualified stated interest allocable to the accrual period. Do state taxes Accrual period. Do state taxes   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. Do state taxes Your tax year will usually include parts of two accrual periods. Do state taxes Daily OID. Do state taxes   The OID for any accrual period is allocated equally to each day in the accrual period. Do state taxes You must include in income the sum of the OID amounts for each day you hold the debt instrument during the year. Do state taxes If your tax year includes parts of two or more accrual periods, you must include the proper daily OID amounts for each accrual period. Do state taxes Figuring daily OID. Do state taxes   The daily OID for the initial accrual period is figured using the following formula. Do state taxes   (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. Do state taxes Reduction for acquisition premium on debt instruments purchased before July 19, 1984. Do state taxes   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. Do state taxes 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. Do state taxes Reduction for acquisition premium on debt instruments purchased after July 18, 1984. Do state taxes   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. Do state taxes However, the method of figuring the daily acquisition premium is different from the method described in the preceding discussion. Do state taxes To figure the daily acquisition premium under this method, multiply the daily OID by the following fraction. Do state taxes The numerator is the acquisition premium. Do state taxes The denominator is the total OID remaining for the debt instrument after your purchase date. Do state taxes Section I-A is available at www. Do state taxes irs. Do state taxes gov/pub1212 and clicking the link under Recent Developments. Do state taxes Using Section I-A to figure accumulated OID. Do state taxes   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. Do state taxes The amount from the “Total OID to January 1, YYYY” column for your debt instrument. Do state taxes The OID from January 1 of a calendar year to the date of purchase, figured as follows. Do state taxes 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. Do state taxes 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. Do state taxes Add the amounts figured in (2a) and (2b). Do state taxes 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. Do state taxes You must include the OID in gross income whether or not you hold the debt instrument as a capital asset. Do state taxes Your basis in the debt instrument is increased by the OID you include in income. Do state taxes For information about showing the correct OID on your tax return, see How To Report OID, earlier. Do state taxes Form 1099-OID. Do state taxes   You should receive a Form 1099-OID showing OID for the part of a calendar year you held the debt instrument. Do state taxes However, if you paid an acquisition premium, you may need to refigure the OID to report on your tax return. Do state taxes See Constant yield method and Reduction for acquisition premium, later. Do state taxes   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. Do state taxes See Contingent Payment Debt Instruments or Inflation-Indexed Debt Instruments, later. Do state taxes 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. Do state taxes irs. Do state taxes gov/pub1212 by clicking the link under Recent Developments. Do state taxes Form 1099-OID not received. Do state taxes   The OID listed is for each $1,000 of redemption price. Do state taxes You must adjust the listed amount if your debt instrument has a different principal amount. Do state taxes For example, if you have a debt instrument with a $500 principal amount, use one-half the listed amount to figure your OID. Do state taxes   Use the OID shown in Section I-B for a calendar year if you held the debt instrument the entire year. Do state taxes (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. Do state taxes ) If you did not hold the debt instrument the entire year, figure your OID as follows. Do state taxes Look up the daily OID for the first accrual period in which you held the debt instrument during a calendar year. Do state taxes (See Accrual period under Constant yield method, later. Do state taxes ) Multiply the daily OID by the number of days you held the debt instrument during that accrual period. Do state taxes Repeat (1) and (2) for any remaining accrual periods in which you held the debt instrument. Do state taxes Add the results of (2) and (3). Do state taxes This is the OID to include in income for that year, unless you paid an acquisition premium. Do state taxes (The reduction for acquisition premium is discussed later. Do state taxes ) Tax-exempt bond. Do state taxes   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. Do state taxes You need to make this adjustment to determine if you have a gain or loss on a later disposition of the bond. Do state taxes In general, use the rules that follow to determine your OID. Do state taxes Constant yield method. Do state taxes   This discussion shows how to figure OID on debt instruments issued after 1984 using a constant yield method. Do state taxes (The special rules that apply to contingent payment debt instruments and inflation-indexed debt instruments are explained later. Do state taxes ) OID is allocated over the life of the debt instrument through adjustments to the issue price for each accrual period. Do state taxes   Figure the OID allocable to any accrual period as follows. Do state taxes Multiply the adjusted issue price at the beginning of the accrual period by a fraction. Do state taxes The numerator of the fraction is the debt instrument's yield to maturity and the denominator is the number of accrual periods per year. Do state taxes The yield must be stated appropriately taking into account the length of the particular accrual period. Do state taxes Subtract from the result in (1) any qualified stated interest allocable to the accrual period. Do state taxes Accrual period. Do state taxes   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. Do state taxes For example, a debt instrument maturing on March 31 has accrual periods that end on September 30 and March 31 of each calendar year. Do state taxes Any short period is included as the first accrual period. Do state taxes   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. Do state taxes However, the OID listed for these debt instruments in Section I-B has been figured using 6-month accrual periods. Do state taxes Daily OID. Do state taxes   The OID for any accrual period is allocated equally to each day in the accrual period. Do state taxes Figure the amount to include in income by adding the OID for each day you hold the debt instrument during the year. Do state taxes 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. Do state taxes 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. Do state taxes Figuring daily OID. Do state taxes   The daily OID for the initial accrual period is figured using the following formula. Do state taxes   (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. Do state taxes Example 5. Do state taxes On January 1 of Year 1, you bought a 15-year, 10% debt instrument of A Corporation at original issue for $86,235. Do state taxes 17. Do state taxes According to the prospectus, the debt instrument matures on December 31 of Year 15 at a stated redemption price of $100,000. Do state taxes The yield to maturity is 12%, compounded semiannually. Do state taxes The debt instrument provides for qualified stated interest payments of $5,000 on June 30 and December 31 of each calendar year. Do state taxes The accrual periods are the 6-month periods ending on each of these dates. Do state taxes The number of days for the first accrual period (January 1 through June 30) is 181 days (182 for leap years). Do state taxes The daily OID for the first accrual period is figured as follows. Do state taxes   ($86,235. Do state taxes 17 x . Do state taxes 12/2) – $5,000     181 days     = $174. Do state taxes 11020 = $. Do state taxes 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. Do state taxes 17 + $174. Do state taxes 11), or $86,409. Do state taxes 28. Do state taxes The number of days for the second accrual period (July 1 through December 31) is 184 days. Do state taxes The daily OID for the second accrual period is figured as follows. Do state taxes   ($86,409. Do state taxes 28 x . Do state taxes 12/2) – $5,000     184 days     = $184. Do state taxes 55681 = $1. Do state taxes 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, $174. Do state taxes 11 ($. Do state taxes 95665 × 182 days) plus $184. Do state taxes 56 ($1. Do state taxes 00303 × 184 days), or $358. Do state taxes 67. Do state taxes Add the OID to the $10,000 interest you report on your income tax return for Year 1. Do state taxes Example 6. Do state taxes 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. Do state taxes Also, the interest payment dates are October 31 and April 30 of each calendar year. Do state taxes The accrual periods are the 6-month periods ending on each of these dates. Do state taxes The number of days for the first accrual period (May 1 through October 31) is 184 days. Do state taxes The daily OID for the first accrual period is figured as follows. Do state taxes   ($86,235. Do state taxes 17 x . Do state taxes 12/2) – $5,000     184 days     = $174. Do state taxes 11020 = $. Do state taxes 94625   184           The number of days for the second accrual period (November 1 through April 30) is 181 days (182 for leap years). Do state taxes The daily OID for the second accrual period is figured as follows. Do state taxes   ($86,409. Do state taxes 28 x . Do state taxes 12/2) – $5,000     181 days     = $184. Do state taxes 55681 = $1. Do state taxes 01965   181 If you hold the debt instrument through the end of Year 1, you must include $236. Do state taxes 31 of OID in income. Do state taxes This is $174. Do state taxes 11 ($. Do state taxes 94625 × 184 days) for the period May 1 through October 31 plus $62. Do state taxes 20 ($1. Do state taxes 01965 × 61 days) for the period November 1 through December 31. Do state taxes The OID is added to the $5,000 interest income paid on October 31 of Year 1. Do state taxes Your basis in the debt instrument is increased by the OID you include in income. Do state taxes On January 1 of Year 2, your basis in the A Corporation debt instrument is $86,471. Do state taxes 48 ($86,235. Do state taxes 17 + $236. Do state taxes 31). Do state taxes Short first accrual period. Do state taxes   You may have to make adjustments if a debt instrument has a short first accrual period. Do state taxes 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. Do state taxes (The remaining accrual periods begin on May 1 and November 1. Do state taxes ) For this short period, figure the daily OID as described earlier, but adjust the yield for the length of the short accrual period. Do state taxes You may use any reasonable compounding method in determining OID for a short period. Do state taxes Examples of reasonable compounding methods include continuous compounding and monthly compounding (that is, simple interest within a month). Do state taxes Consult your tax advisor for more information about making this computation. Do state taxes   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. Do state taxes Reduction for acquisition premium. Do state taxes   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. Do state taxes To figure the daily acquisition premium, multiply the daily OID by the following fraction. Do state taxes The numerator is the acquisition premium. Do state taxes The denominator is the total OID remaining for the debt instrument after your purchase date. Do state taxes Example 7. Do state taxes 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. Do state taxes The adjusted issue price on November 1 of Year 1 is $86,409. Do state taxes 28 ($86,235. Do state taxes 17 + $174. Do state taxes 11). Do state taxes In this case, you paid an acquisition premium of $590. Do state taxes 72 ($87,000 − $86,409. Do state taxes 28). Do state taxes The daily OID for the accrual period November 1 through April 30, reduced for the acquisition premium, is figured as follows. Do state taxes 1) Daily OID on date of purchase (2nd accrual period) $1. Do state taxes 01965*  2)  Acquisition premium $590. Do state taxes 72    3)  Total OID remaining after purchase date ($13,764. Do state taxes 83 − $174. Do state taxes 11) 13,590. Do state taxes 72   4) Line 2 ÷ line 3 . Do state taxes 04346  5)  Line 1 × line 4 . Do state taxes 04432  6)  Daily OID reduced for the acquisition premium. Do state taxes Line 1 − line 5 $0. Do state taxes 97533  * As shown in Example 6. Do state taxes The total OID to include in income for Year 1 is $59. Do state taxes 50 ($. Do state taxes 97533 × 61 days). Do state taxes 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. Do state taxes In general, a contingent payment debt instrument provides for one or more payments that are contingent as to timing or amount. Do state taxes If you hold a contingent payment bond, you must report OID as it accrues each year. Do state taxes 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. Do state taxes To figure OID accruals on contingent payment debt instruments, holders and issuers must use the noncontingent bond method. Do state taxes Noncontingent bond method. Do state taxes    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. Do state taxes In general, holders and issuers accrue OID on this projected payment schedule using the constant yield method that applies to fixed payment debt instruments. Do state taxes When a contingent payment differs from the projected fixed amount, the holders and issuers make adjustments to their OID accruals. Do state taxes If the actual contingent payment is larger than expected, both the issuer and the holder increase their OID accruals. Do state taxes If the actual contingent payment is smaller than expected, holders and issuers generally decrease their OID accruals. Do state taxes Form 1099-OID. Do state taxes   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. Do state taxes For example, the amount may not be correct if the contingent payment was different from the projected amount. Do state taxes If the amount in box 1 is not correct, you must figure the OID to report on your return under the following rules. Do state taxes For information on showing an OID adjustment on your tax return, see How To Report OID, earlier. Do state taxes Figuring OID. Do state taxes   To figure OID on a contingent payment debt instrument, you need to know the “comparable yield” and “projected payment schedule” of the debt instrument. Do state taxes The issuer must make these available to you. Do state taxes Comparable yield. Do state taxes   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. Do state taxes The comparable yield is determined as of the debt instrument's issue date. Do state taxes Projected payment schedule. Do state taxes   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. Do state taxes The projected payment schedule is created by the issuer as of the debt instrument's issue date. Do state taxes It is used to determine the issuer's and holder's interest accruals and adjustments. Do state taxes Steps for figuring OID. Do state taxes   Figure the OID on a contingent payment debt instrument in two steps. Do state taxes Figure the OID using the constant yield method (discussed earlier under Debt Instruments Issued After 1984 ) that applies to fixed payment debt instruments. Do state taxes Use the comparable yield as the yield to maturity. Do state taxes 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). Do state taxes Do not treat any amount payable as qualified stated interest. Do state taxes Adjust the OID in (1) to account for actual contingent payments. Do state taxes If the contingent payment is greater than the projected fixed amount, you have a positive adjustment. Do state taxes If the contingent payment is less than the projected fixed amount, you have a negative adjustment. Do state taxes Net positive adjustment. Do state taxes   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. Do state taxes Treat a net positive adjustment as additional OID for the tax year. Do state taxes Net negative adjustment. Do state taxes   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. Do state taxes Use a net negative adjustment to offset OID on the debt instrument for the tax year. Do state taxes 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. Do state taxes 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. Do state taxes 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. Do state taxes Basis adjustments. Do state taxes   In general, increase your basis in a contingent payment debt instrument by the OID included in income. Do state taxes Your basis, however, is not affected by any negative or positive adjustments. Do state taxes Decrease your basis by any noncontingent payment received and the projected contingent payment scheduled to be received. Do state taxes Treatment of gain or loss on sale or exchange. Do state taxes   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. Do state taxes 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. Do state taxes If the debt instrument is a capital asset, treat any loss that is more than your prior OID accruals as a capital loss. Do state taxes See Regulations section 1. Do state taxes 1275-4 for exceptions to these rules. Do state taxes Premium, acquisition premium, and market discount. Do state taxes   The rules for accruing premium, acquisition premium, and market discount do not apply to a contingent payment debt instrument. Do state taxes See Regulations section 1. Do state taxes 1275-4 to determine how to account for these items. Do state taxes Inflation-Indexed Debt Instruments This discussion shows how you figure OID on certain inflation-indexed debt instruments issued after January 5, 1997. Do state taxes An inflation-indexed debt instrument is generally a debt instrument on which the payments are adjusted for inflation and d