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File 2012 taxes late 3. File 2012 taxes late   Rent Expense Table of Contents Introduction Topics - This chapter discusses: RentConditional sales contract. File 2012 taxes late Leveraged leases. File 2012 taxes late Leveraged leases of limited-use property. File 2012 taxes late Taxes on Leased Property Cost of Getting a Lease Improvements by Lessee Capitalizing Rent Expenses Introduction This chapter discusses the tax treatment of rent or lease payments you make for property you use in your business but do not own. File 2012 taxes late It also discusses how to treat other kinds of payments you make that are related to your use of this property. File 2012 taxes late These include payments you make for taxes on the property. File 2012 taxes late Topics - This chapter discusses: The definition of rent Taxes on leased property The cost of getting a lease Improvements by the lessee Capitalizing rent expenses Rent Rent is any amount you pay for the use of property you do not own. File 2012 taxes late In general, you can deduct rent as an expense only if the rent is for property you use in your trade or business. File 2012 taxes late If you have or will receive equity in or title to the property, the rent is not deductible. File 2012 taxes late Unreasonable rent. File 2012 taxes late   You cannot take a rental deduction for unreasonable rent. File 2012 taxes late Ordinarily, the issue of reasonableness arises only if you and the lessor are related. File 2012 taxes late Rent paid to a related person is reasonable if it is the same amount you would pay to a stranger for use of the same property. File 2012 taxes late Rent is not unreasonable just because it is figured as a percentage of gross sales. File 2012 taxes late For examples of related persons, see Related persons in chapter 2, Publication 544. File 2012 taxes late Rent on your home. File 2012 taxes late   If you rent your home and use part of it as your place of business, you may be able to deduct the rent you pay for that part. File 2012 taxes late You must meet the requirements for business use of your home. File 2012 taxes late For more information, see Business use of your home in chapter 1. File 2012 taxes late Rent paid in advance. File 2012 taxes late   Generally, rent paid in your trade or business is deductible in the year paid or accrued. File 2012 taxes late If you pay rent in advance, you can deduct only the amount that applies to your use of the rented property during the tax year. File 2012 taxes late You can deduct the rest of your payment only over the period to which it applies. File 2012 taxes late Example 1. File 2012 taxes late You are a calendar year taxpayer and you leased a building for 5 years beginning July 1. File 2012 taxes late Your rent is $12,000 per year. File 2012 taxes late You paid the first year's rent ($12,000) on June 30. File 2012 taxes late You can deduct only $6,000 (6/12 × $12,000) for the rent that applies to the first year. File 2012 taxes late Example 2. File 2012 taxes late You are a calendar year taxpayer. File 2012 taxes late Last January you leased property for 3 years for $6,000 a year. File 2012 taxes late You paid the full $18,000 (3 × $6,000) during the first year of the lease. File 2012 taxes late Each year you can deduct only $6,000, the part of the lease that applies to that year. File 2012 taxes late Canceling a lease. File 2012 taxes late   You generally can deduct as rent an amount you pay to cancel a business lease. File 2012 taxes late Lease or purchase. File 2012 taxes late   There may be instances in which you must determine whether your payments are for rent or for the purchase of the property. File 2012 taxes late You must first determine whether your agreement is a lease or a conditional sales contract. File 2012 taxes late Payments made under a conditional sales contract are not deductible as rent expense. File 2012 taxes late Conditional sales contract. File 2012 taxes late   Whether an agreement is a conditional sales contract depends on the intent of the parties. File 2012 taxes late Determine intent based on the provisions of the agreement and the facts and circumstances that exist when you make the agreement. File 2012 taxes late No single test, or special combination of tests, always applies. File 2012 taxes late However, in general, an agreement may be considered a conditional sales contract rather than a lease if any of the following is true. File 2012 taxes late The agreement applies part of each payment toward an equity interest you will receive. File 2012 taxes late You get title to the property after you make a stated amount of required payments. File 2012 taxes late The amount you must pay to use the property for a short time is a large part of the amount you would pay to get title to the property. File 2012 taxes late You pay much more than the current fair rental value of the property. File 2012 taxes late You have an option to buy the property at a nominal price compared to the value of the property when you may exercise the option. File 2012 taxes late Determine this value when you make the agreement. File 2012 taxes late You have an option to buy the property at a nominal price compared to the total amount you have to pay under the agreement. File 2012 taxes late The agreement designates part of the payments as interest, or that part is easy to recognize as interest. File 2012 taxes late Leveraged leases. File 2012 taxes late   Leveraged lease transactions may not be considered leases. File 2012 taxes late Leveraged leases generally involve three parties: a lessor, a lessee, and a lender to the lessor. File 2012 taxes late Usually the lease term covers a large part of the useful life of the leased property, and the lessee's payments to the lessor are enough to cover the lessor's payments to the lender. File 2012 taxes late   If you plan to take part in what appears to be a leveraged lease, you may want to get an advance ruling. File 2012 taxes late Revenue Procedure 2001-28 on page 1156 of Internal Revenue Bulletin 2001-19 contains the guidelines the IRS will use to determine if a leveraged lease is a lease for federal income tax purposes. File 2012 taxes late Revenue Procedure 2001-29 on page 1160 of the same Internal Revenue Bulletin provides the information required to be furnished in a request for an advance ruling on a leveraged lease transaction. File 2012 taxes late Internal Revenue Bulletin 2001-19 is available at www. File 2012 taxes late irs. File 2012 taxes late gov/pub/irs-irbs/irb01-19. File 2012 taxes late pdf. File 2012 taxes late   In general, Revenue Procedure 2001-28 provides that, for advance ruling purposes only, the IRS will consider the lessor in a leveraged lease transaction to be the owner of the property and the transaction to be a valid lease if all the factors in the revenue procedure are met, including the following. File 2012 taxes late The lessor must maintain a minimum unconditional “at risk” equity investment in the property (at least 20% of the cost of the property) during the entire lease term. File 2012 taxes late The lessee may not have a contractual right to buy the property from the lessor at less than fair market value when the right is exercised. File 2012 taxes late The lessee may not invest in the property, except as provided by Revenue Procedure 2001-28. File 2012 taxes late The lessee may not lend any money to the lessor to buy the property or guarantee the loan used by the lessor to buy the property. File 2012 taxes late The lessor must show that it expects to receive a profit apart from the tax deductions, allowances, credits, and other tax attributes. File 2012 taxes late   The IRS may charge you a user fee for issuing a tax ruling. File 2012 taxes late For more information, see Revenue Procedure 2014-1 available at  www. File 2012 taxes late irs. File 2012 taxes late gov/irb/2014-1_IRB/ar05. File 2012 taxes late html. File 2012 taxes late Leveraged leases of limited-use property. File 2012 taxes late   The IRS will not issue advance rulings on leveraged leases of so-called limited-use property. File 2012 taxes late Limited-use property is property not expected to be either useful to or usable by a lessor at the end of the lease term except for continued leasing or transfer to a lessee. File 2012 taxes late See Revenue Procedure 2001-28 for examples of limited-use property and property that is not limited-use property. File 2012 taxes late Leases over $250,000. File 2012 taxes late   Special rules are provided for certain leases of tangible property. File 2012 taxes late The rules apply if the lease calls for total payments of more than $250,000 and any of the following apply. File 2012 taxes late Rents increase during the lease. File 2012 taxes late Rents decrease during the lease. File 2012 taxes late Rents are deferred (rent is payable after the end of the calendar year following the calendar year in which the use occurs and the rent is allocated). File 2012 taxes late Rents are prepaid (rent is payable before the end of the calendar year preceding the calendar year in which the use occurs and the rent is allocated). File 2012 taxes late These rules do not apply if your lease specifies equal amounts of rent for each month in the lease term and all rent payments are due in the calendar year to which the rent relates (or in the preceding or following calendar year). File 2012 taxes late   Generally, if the special rules apply, you must use an accrual method of accounting (and time value of money principles) for your rental expenses, regardless of your overall method of accounting. File 2012 taxes late In addition, in certain cases in which the IRS has determined that a lease was designed to achieve tax avoidance, you must take rent and stated or imputed interest into account under a constant rental accrual method in which the rent is treated as accruing ratably over the entire lease term. File 2012 taxes late For details, see section 467 of the Internal Revenue Code. File 2012 taxes late Taxes on Leased Property If you lease business property, you can deduct as additional rent any taxes you have to pay to or for the lessor. File 2012 taxes late When you can deduct these taxes as additional rent depends on your accounting method. File 2012 taxes late Cash method. File 2012 taxes late   If you use the cash method of accounting, you can deduct the taxes as additional rent only for the tax year in which you pay them. File 2012 taxes late Accrual method. File 2012 taxes late   If you use an accrual method of accounting, you can deduct taxes as additional rent for the tax year in which you can determine all the following. File 2012 taxes late That you have a liability for taxes on the leased property. File 2012 taxes late How much the liability is. File 2012 taxes late That economic performance occurred. File 2012 taxes late   The liability and amount of taxes are determined by state or local law and the lease agreement. File 2012 taxes late Economic performance occurs as you use the property. File 2012 taxes late Example 1. File 2012 taxes late Oak Corporation is a calendar year taxpayer that uses an accrual method of accounting. File 2012 taxes late Oak leases land for use in its business. File 2012 taxes late Under state law, owners of real property become liable (incur a lien on the property) for real estate taxes for the year on January 1 of that year. File 2012 taxes late However, they do not have to pay these taxes until July 1 of the next year (18 months later) when tax bills are issued. File 2012 taxes late Under the terms of the lease, Oak becomes liable for the real estate taxes in the later year when the tax bills are issued. File 2012 taxes late If the lease ends before the tax bill for a year is issued, Oak is not liable for the taxes for that year. File 2012 taxes late Oak cannot deduct the real estate taxes as rent until the tax bill is issued. File 2012 taxes late This is when Oak's liability under the lease becomes fixed. File 2012 taxes late Example 2. File 2012 taxes late The facts are the same as in Example 1 except that, according to the terms of the lease, Oak becomes liable for the real estate taxes when the owner of the property becomes liable for them. File 2012 taxes late As a result, Oak will deduct the real estate taxes as rent on its tax return for the earlier year. File 2012 taxes late This is the year in which Oak's liability under the lease becomes fixed. File 2012 taxes late Cost of Getting a Lease You may either enter into a new lease with the lessor of the property or get an existing lease from another lessee. File 2012 taxes late Very often when you get an existing lease from another lessee, you must pay the previous lessee money to get the lease, besides having to pay the rent on the lease. File 2012 taxes late If you get an existing lease on property or equipment for your business, you generally must amortize any amount you pay to get that lease over the remaining term of the lease. File 2012 taxes late For example, if you pay $10,000 to get a lease and there are 10 years remaining on the lease with no option to renew, you can deduct $1,000 each year. File 2012 taxes late The cost of getting an existing lease of tangible property is not subject to the amortization rules for section 197 intangibles discussed in chapter 8. File 2012 taxes late Option to renew. File 2012 taxes late   The term of the lease for amortization includes all renewal options plus any other period for which you and the lessor reasonably expect the lease to be renewed. File 2012 taxes late However, this applies only if less than 75% of the cost of getting the lease is for the term remaining on the purchase date (not including any period for which you may choose to renew, extend, or continue the lease). File 2012 taxes late Allocate the lease cost to the original term and any option term based on the facts and circumstances. File 2012 taxes late In some cases, it may be appropriate to make the allocation using a present value computation. File 2012 taxes late For more information, see Regulations section 1. File 2012 taxes late 178-1(b)(5). File 2012 taxes late Example 1. File 2012 taxes late You paid $10,000 to get a lease with 20 years remaining on it and two options to renew for 5 years each. File 2012 taxes late Of this cost, you paid $7,000 for the original lease and $3,000 for the renewal options. File 2012 taxes late Because $7,000 is less than 75% of the total $10,000 cost of the lease (or $7,500), you must amortize the $10,000 over 30 years. File 2012 taxes late That is the remaining life of your present lease plus the periods for renewal. File 2012 taxes late Example 2. File 2012 taxes late The facts are the same as in Example 1, except that you paid $8,000 for the original lease and $2,000 for the renewal options. File 2012 taxes late You can amortize the entire $10,000 over the 20-year remaining life of the original lease. File 2012 taxes late The $8,000 cost of getting the original lease was not less than 75% of the total cost of the lease (or $7,500). File 2012 taxes late Cost of a modification agreement. File 2012 taxes late   You may have to pay an additional “rent” amount over part of the lease period to change certain provisions in your lease. File 2012 taxes late You must capitalize these payments and amortize them over the remaining period of the lease. File 2012 taxes late You cannot deduct the payments as additional rent, even if they are described as rent in the agreement. File 2012 taxes late Example. File 2012 taxes late You are a calendar year taxpayer and sign a 20-year lease to rent part of a building starting on January 1. File 2012 taxes late However, before you occupy it, you decide that you really need less space. File 2012 taxes late The lessor agrees to reduce your rent from $7,000 to $6,000 per year and to release the excess space from the original lease. File 2012 taxes late In exchange, you agree to pay an additional rent amount of $3,000, payable in 60 monthly installments of $50 each. File 2012 taxes late   You must capitalize the $3,000 and amortize it over the 20-year term of the lease. File 2012 taxes late Your amortization deduction each year will be $150 ($3,000 ÷ 20). File 2012 taxes late You cannot deduct the $600 (12 × $50) that you will pay during each of the first 5 years as rent. File 2012 taxes late Commissions, bonuses, and fees. File 2012 taxes late   Commissions, bonuses, fees, and other amounts you pay to get a lease on property you use in your business are capital costs. File 2012 taxes late You must amortize these costs over the term of the lease. File 2012 taxes late Loss on merchandise and fixtures. File 2012 taxes late   If you sell at a loss merchandise and fixtures that you bought solely to get a lease, the loss is a cost of getting the lease. File 2012 taxes late You must capitalize the loss and amortize it over the remaining term of the lease. File 2012 taxes late Improvements by Lessee If you add buildings or make other permanent improvements to leased property, depreciate the cost of the improvements using the modified accelerated cost recovery system (MACRS). File 2012 taxes late Depreciate the property over its appropriate recovery period. File 2012 taxes late You cannot amortize the cost over the remaining term of the lease. File 2012 taxes late If you do not keep the improvements when you end the lease, figure your gain or loss based on your adjusted basis in the improvements at that time. File 2012 taxes late For more information, see the discussion of MACRS in Publication 946, How To Depreciate Property. File 2012 taxes late Assignment of a lease. File 2012 taxes late   If a long-term lessee who makes permanent improvements to land later assigns all lease rights to you for money and you pay the rent required by the lease, the amount you pay for the assignment is a capital investment. File 2012 taxes late If the rental value of the leased land increased since the lease began, part of your capital investment is for that increase in the rental value. File 2012 taxes late The rest is for your investment in the permanent improvements. File 2012 taxes late   The part that is for the increased rental value of the land is a cost of getting a lease, and you amortize it over the remaining term of the lease. File 2012 taxes late You can depreciate the part that is for your investment in the improvements over the recovery period of the property as discussed earlier, without regard to the lease term. File 2012 taxes late Capitalizing Rent Expenses Under the uniform capitalization rules, you must capitalize the direct costs and part of the indirect costs for certain production or resale activities. File 2012 taxes late Include these costs in the basis of property you produce or acquire for resale, rather than claiming them as a current deduction. File 2012 taxes late You recover the costs through depreciation, amortization, or cost of goods sold when you use, sell, or otherwise dispose of the property. File 2012 taxes late Indirect costs include amounts incurred for renting or leasing equipment, facilities, or land. File 2012 taxes late Uniform capitalization rules. File 2012 taxes late   You may be subject to the uniform capitalization rules if you do any of the following, unless the property is produced for your use other than in a business or an activity carried on for profit. File 2012 taxes late Produce real property or tangible personal property. File 2012 taxes late For this purpose, tangible personal property includes a film, sound recording, video tape, book, or similar property. File 2012 taxes late Acquire property for resale. File 2012 taxes late However, these rules do not apply to the following property. File 2012 taxes late Personal property you acquire for resale if your average annual gross receipts are $10 million or less for the 3 prior tax years. File 2012 taxes late Property you produce if you meet either of the following conditions. File 2012 taxes late Your indirect costs of producing the property are $200,000 or less. File 2012 taxes late You use the cash method of accounting and do not account for inventories. File 2012 taxes late Example 1. File 2012 taxes late You rent construction equipment to build a storage facility. File 2012 taxes late If you are subject to the uniform capitalization rules, you must capitalize as part of the cost of the building the rent you paid for the equipment. File 2012 taxes late You recover your cost by claiming a deduction for depreciation on the building. File 2012 taxes late Example 2. File 2012 taxes late You rent space in a facility to conduct your business of manufacturing tools. File 2012 taxes late If you are subject to the uniform capitalization rules, you must include the rent you paid to occupy the facility in the cost of the tools you produce. File 2012 taxes late More information. File 2012 taxes late   For more information on these rules, see Uniform Capitalization Rules in Publication 538 and the regulations under Internal Revenue Code section 263A. File 2012 taxes late Prev  Up  Next   Home   More Online Publications
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Understanding your CP22A Notice

We made the change(s) you requested to your tax return for the tax year specified on the notice. You owe money on your taxes as a result of the change(s).

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How to get help

Calling the toll free number listed on the top right corner of your notice is the fastest way to get your questions answered.

You can also authorize someone (such as an accountant) to contact the IRS on your behalf using this Power of Attorney and Declaration of Representative (Form 2848).

Or you may qualify for help from a Low Income Taxpayer Clinic.
 


What you need to do

  • Read your notice carefully ― it will explain why you owe money on your taxes.
  • Pay the amount owed by the date on the notice's payment coupon.
  • Make payment arrangements if you can't pay the full amount you owe.
  • Contact us if you disagree with the change(s) we made.
  • Correct the copy of your tax return that you kept for your records.

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Answers to Common Questions

The notice says "Based on the information you provided, we changed your 200X Form 1040 to correct your:..." but I don't remember sending any change to IRS. How can I find out what IRS received to initiate this change?
Please contact us at the number listed on the top right corner of your notice for specific information about your tax return.

What do I say when I call the IRS?
Mention that you got a CP22A notice with a balance due and you need to review your account with a customer service representative. Be sure to have a copy of your notice and your tax return before you call.

What should I do if I disagree with the changes you made?
If you disagree, contact us at the toll-free number listed on the top right corner of your notice.

What happens if I can't pay the full amount I owe?
You can arrange to make a payment plan with us if you can't pay the full amount you owe.

Am I charged interest on the money I owe?
If you don't full pay the amount you owe by the date on the payment coupon, interest will accrue on the unpaid balance after that date.

Will I receive a penalty if I can't pay the full amount?
Yes, you'll receive a late payment penalty. You can contact us at the number listed on your notice if you’re unable to pay the full amount shown in your specific notice because of circumstances beyond your control. Contact us by the due date of your payment and, depending on your situation, we may be able to remove the penalty.

Can I set up a payment plan?
Yes. Call the toll-free number listed on the top right corner of your notice to discuss payment options or check out more information on payment options and how to make a payment arrangement.

There are other options, such as paying by credit card. Note: There may be a fee to pay by credit card.

What if I need to make another correction to my account?
You'll need to file Form 1040X, Amended U.S. Individual Income Tax Return.

What if I have tried to get answers and after contacting IRS several times have not been successful?
Call Taxpayer Advocate at 1-877-777-4778 or for TTY/TDD 1-800-829-4059.

What if I think I’m a victim of identity theft?
Please contact us at the number listed on the top right corner of your notice. Refer to the IRS Identity Theft resource page for more information.


Tips for next year

Consider filing your taxes electronically. Filing online can help you avoid mistakes and find credits and deductions that you may qualify for. In many cases you can file for free. Learn more about e-file.

Page Last Reviewed or Updated: 03-Mar-2014

The File 2012 Taxes Late

File 2012 taxes late 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. File 2012 taxes late Adjustment for premium. File 2012 taxes late Adjustment for acquisition premium. File 2012 taxes late Adjustment for market discount. File 2012 taxes late 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. File 2012 taxes late “Original issue discount” is defined first. File 2012 taxes late The other terms are listed alphabetically. File 2012 taxes late Original issue discount (OID). File 2012 taxes late   OID is a form of interest. File 2012 taxes late 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). File 2012 taxes late Zero coupon bonds and debt instruments that pay no stated interest until maturity are examples of debt instruments that have OID. File 2012 taxes late Accrual period. File 2012 taxes late   An accrual period is an interval of time used to measure OID. File 2012 taxes late The length of an accrual period can be 6 months, a year, or some other period, depending on when the debt instrument was issued. File 2012 taxes late Acquisition premium. File 2012 taxes late   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. File 2012 taxes late A debt instrument does not have acquisition premium, however, if the debt instrument was purchased at a premium. File 2012 taxes late See Premium, later. File 2012 taxes late Adjusted issue price. File 2012 taxes late   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. File 2012 taxes late In general, the adjusted issue price at the beginning of the debt instrument's first accrual period is its issue price. File 2012 taxes late 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. File 2012 taxes late Debt instrument. File 2012 taxes late   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). File 2012 taxes late It generally does not include an annuity contract. File 2012 taxes late Issue price. File 2012 taxes late   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. File 2012 taxes late Market discount. File 2012 taxes late   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. File 2012 taxes late 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. File 2012 taxes late The market discount is the difference between the issue price plus accrued OID and your adjusted basis. File 2012 taxes late Premium. File 2012 taxes late   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. File 2012 taxes late The premium is the excess of the adjusted basis over the payable amounts. File 2012 taxes late See Publication 550 for information on the tax treatment of bond premium. File 2012 taxes late Qualified stated interest. File 2012 taxes late   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. File 2012 taxes late Stated redemption price at maturity. File 2012 taxes late   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. File 2012 taxes late Yield to maturity (YTM). File 2012 taxes late   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. File 2012 taxes late The YTM is generally shown on the face of the debt instrument or in the literature you receive from your broker. File 2012 taxes late If you do not have this information, consult your broker, tax advisor, or the issuer. File 2012 taxes late 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. File 2012 taxes late 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. File 2012 taxes late The OID amounts listed are figured without reference to the price or date at which you acquired the debt instrument. File 2012 taxes late 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. File 2012 taxes late The following discussions explain what information is contained in each section of the list. File 2012 taxes late Section I. File 2012 taxes late   This section contains publicly offered, long-term debt instruments. File 2012 taxes late Section I-A: Corporate Debt Instruments Issued Before 1985. File 2012 taxes late Section I-B: Corporate Debt Instruments Issued After 1984. File 2012 taxes late Section I-C: Inflation-Indexed Debt Instruments. File 2012 taxes late For each publicly offered debt instrument in Section I, the list contains the following information. File 2012 taxes late The name of the issuer. File 2012 taxes late The Committee on Uniform Security Identification Procedures (CUSIP) number. File 2012 taxes late The issue date. File 2012 taxes late The maturity date. File 2012 taxes late The issue price expressed as a percent of principal or of stated redemption price at maturity. File 2012 taxes late The annual stated or coupon interest rate. File 2012 taxes late (This rate is shown as 0. File 2012 taxes late 00 if no annual interest payments are provided. File 2012 taxes late ) The yield to maturity will be added to Section I-B for bonds issued after December 31, 2006. File 2012 taxes late The total OID accrued up to January 1 of a calendar year. File 2012 taxes late (This information is not available for every instrument. File 2012 taxes late ) 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. File 2012 taxes late The total OID per $1,000 of principal or maturity value for a calendar year and a subsequent year. File 2012 taxes late Section II. File 2012 taxes late   This section contains stripped coupons and principal components of U. File 2012 taxes late S. File 2012 taxes late Treasury and Government-Sponsored Enterprise debt instruments. File 2012 taxes late 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. File 2012 taxes late This section also includes debt instruments backed by U. File 2012 taxes late S. File 2012 taxes late Treasury securities that represent ownership interests in those securities. File 2012 taxes late   The obligations listed in Section II are arranged by maturity date. File 2012 taxes late The amounts listed are the total OID for a calendar year per $1,000 of redemption price. File 2012 taxes late Section III. File 2012 taxes late   This section contains short-term discount obligations. File 2012 taxes late Section III-A: Short-Term U. File 2012 taxes late S. File 2012 taxes late Treasury Bills. File 2012 taxes late Section III-B: Federal Home Loan Banks. File 2012 taxes late Section III-C: Federal National Mortgage Association. File 2012 taxes late Section III-D: Federal Farm Credit Banks. File 2012 taxes late Section III-E: Federal Home Loan Mortgage Corporation. File 2012 taxes late Section III-F: Federal Agricultural Mortgage Corporation. File 2012 taxes late    Information that supplements Section III-A is available on the Internet at http://www. File 2012 taxes late treasurydirect. File 2012 taxes late gov/tdhome. File 2012 taxes late htm. File 2012 taxes late   The short-term obligations listed in this section are arranged by maturity date. File 2012 taxes late 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. File 2012 taxes late 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. File 2012 taxes late Debt Instruments Not on the OID List The list of debt instruments discussed earlier does not contain the following items. File 2012 taxes late U. File 2012 taxes late S. File 2012 taxes late savings bonds. File 2012 taxes late Certificates of deposit and other face-amount certificates issued at a discount, including syndicated certificates of deposit. File 2012 taxes late Obligations issued by tax-exempt organizations. File 2012 taxes late OID debt instruments that matured or were entirely called by the issuer before the tables were posted on the IRS website. File 2012 taxes late Mortgage-backed securities and mortgage participation certificates. File 2012 taxes late Long-term OID debt instruments issued before May 28, 1969. File 2012 taxes late Short-term obligations, other than the obligations listed in Section III. File 2012 taxes late Debt instruments issued at a discount by states or their political subdivisions. File 2012 taxes late REMIC regular interests and CDOs. File 2012 taxes late Commercial paper and banker's acceptances issued at a discount. File 2012 taxes late Obligations issued at a discount by individuals. File 2012 taxes late Foreign obligations not traded in the United States and obligations not issued in the United States. File 2012 taxes late 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. File 2012 taxes late 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. File 2012 taxes late 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. File 2012 taxes late See Backup Withholding, later. File 2012 taxes late 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. File 2012 taxes late 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). File 2012 taxes late Electronic payee statements. File 2012 taxes late   You can issue Form 1099-OID electronically with the consent of the recipient. File 2012 taxes late More information. File 2012 taxes late   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. File 2012 taxes late 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. File 2012 taxes late 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. File 2012 taxes late If you sell the obligation for the owner before maturity, you must file Form 1099-B to reflect the gross proceeds to the seller. File 2012 taxes late Do not report the accrued discount to the date of sale on either Form 1099-INT or Form 1099-OID. File 2012 taxes late 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. File 2012 taxes late A special rule is used to determine the original issue price for information reporting on U. File 2012 taxes late S. File 2012 taxes late Treasury bills (T-bills) listed in Section III-A. File 2012 taxes late 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. File 2012 taxes late This noncompetitive discount price is the issue price (expressed as a percent of principal) shown in Section III-A. File 2012 taxes late 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. File 2012 taxes late Example 1. File 2012 taxes late There are 13-week and 26-week T-bills maturing on the same date as the T-bill being redeemed. File 2012 taxes late The price actually paid by the owner cannot be established by owner or middleman records. File 2012 taxes late 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. File 2012 taxes late The interest you report on Form 1099-INT is the OID (per $1,000 of principal) shown in Section III-A for that obligation. File 2012 taxes late 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. File 2012 taxes late For this purpose, you can rely on Section I of the OID list to determine the following information. File 2012 taxes late Whether a debt instrument has OID. File 2012 taxes late The OID to be reported on the Form 1099-OID. File 2012 taxes late In general, you must report OID on publicly offered, long-term debt instruments listed in Section I. File 2012 taxes late You also can report OID on other long-term debt instruments. File 2012 taxes late Form 1099-OID. File 2012 taxes late   On Form 1099-OID for a calendar year show the following information. File 2012 taxes late Box 1. File 2012 taxes late The OID for the actual dates the owner held the debt instruments during a calendar year. File 2012 taxes late To determine this amount, see Figuring OID, next. File 2012 taxes late Box 2. File 2012 taxes late The qualified stated interest paid or credited during the calendar year. File 2012 taxes late Interest reported here is not reported on Form 1099-INT. File 2012 taxes late The qualified stated interest on Treasury inflation-protected securities may be reported on Form 1099-INT in box 3 instead. File 2012 taxes late Box 3. File 2012 taxes late Any interest or principal forfeited because of an early withdrawal that the owner can deduct from gross income. File 2012 taxes late Do not reduce the amounts in boxes 1 and 2 by the forfeiture. File 2012 taxes late Box 4. File 2012 taxes late Any backup withholding for this debt instrument. File 2012 taxes late Box 7. File 2012 taxes late The CUSIP number, if any. File 2012 taxes late 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. File 2012 taxes late 50 2006). File 2012 taxes late If the issuer of the debt instrument is other than the payer, show the name of the issuer in this box. File 2012 taxes late Box 8. File 2012 taxes late The OID on a U. File 2012 taxes late S. File 2012 taxes late Treasury obligation for the part of the year the owner held the debt instrument. File 2012 taxes late Box 9. File 2012 taxes late Investment expenses passed on to holders of a single-class REMIC. File 2012 taxes late Boxes 10-12. File 2012 taxes late Use to report any state income tax withheld for this debt instrument. File 2012 taxes late Figuring OID. File 2012 taxes late   You can determine the OID on a long-term debt instrument by using either of the following. File 2012 taxes late Section I of the OID list. File 2012 taxes late The income tax regulations. File 2012 taxes late Using Section I. File 2012 taxes late   If the owner held the debt instrument for the entire calendar year, report the OID shown in Section I for the calendar year. File 2012 taxes late 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. File 2012 taxes late For example, if the debt instrument's stated redemption price at maturity is $500, report one-half the listed OID. File 2012 taxes late   If the owner held the debt instrument for less than the entire calendar year, figure the OID to report as follows. File 2012 taxes late Look up the daily OID for the first accrual period in the calendar year during which the owner held the debt instrument. File 2012 taxes late Multiply the daily OID by the number of days the owner held the debt instrument during that accrual period. File 2012 taxes late Repeat steps (1) and (2) for any remaining accrual periods for the year during which the owner held the debt instrument. File 2012 taxes late Add the results in steps (2) and (3) to determine the owner's OID per $1,000 of stated redemption price at maturity. File 2012 taxes late If necessary, adjust the OID in (4) to reflect the debt instrument's stated redemption price at maturity. File 2012 taxes late Report the result on Form 1099-OID in box 1. File 2012 taxes late Using the income tax regulations. File 2012 taxes late   Instead of using Section I to figure OID, you can use the regulations under sections 1272 through 1275 of the Internal Revenue Code. File 2012 taxes late 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. File 2012 taxes late (If you use Section I-B, the OID is figured using 6-month accrual periods. File 2012 taxes late )   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. File 2012 taxes late 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. File 2012 taxes late You must file an information return showing the reportable interest and OID, if any, on the CD. File 2012 taxes late These rules apply whether or not you sold the CD to the owner. File 2012 taxes late Report OID on a CD in the same way as OID on other debt instruments. File 2012 taxes late See Short-Term Obligations Redeemed at Maturity and Long-Term Debt Instruments, earlier. File 2012 taxes late 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. File 2012 taxes late However, do not report the interest if either of the following apply. File 2012 taxes late You hold the bond as a nominee for the true owner. File 2012 taxes late The payee is a foreign person. File 2012 taxes late See Payments to foreign person under Backup Withholding, later. File 2012 taxes late 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. File 2012 taxes late The coupon may have been “stripped” (separated) from the bond and separately purchased. File 2012 taxes late 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. File 2012 taxes late 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%. File 2012 taxes late The backup withholding is deducted at the time a cash payment is made. File 2012 taxes late See Pub. File 2012 taxes late 1281, Backup Withholding for Missing and Incorrect Name/TIN(s), for more information. File 2012 taxes late Backup withholding generally applies in the following situations. File 2012 taxes late The payee does not give you a taxpayer identification number (TIN). File 2012 taxes late The IRS notifies you that the payee gave an incorrect TIN. File 2012 taxes late The IRS notifies you that the payee is subject to backup withholding due to payee underreporting. File 2012 taxes late 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. File 2012 taxes late However, for short-term discount obligations (other than government obligations), bearer bonds and coupons, and U. File 2012 taxes late S. File 2012 taxes late 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. File 2012 taxes late Short-term obligations. File 2012 taxes late   Backup withholding applies to OID on a short-term obligation only when the OID is paid at maturity. File 2012 taxes late However, backup withholding applies to any interest payable before maturity when the interest is paid or credited. File 2012 taxes late   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. File 2012 taxes late 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. File 2012 taxes late If the purchase price of a listed obligation is not established or is disregarded, you must use the issue price shown in Section III. File 2012 taxes late Long-term obligations. File 2012 taxes late   If no cash payments are made on a long-term obligation before maturity, backup withholding applies only at maturity. File 2012 taxes late The amount subject to backup withholding is the OID includible in the owner's gross income for the calendar year when the obligation matures. File 2012 taxes late The amount to be withheld is limited to the cash paid. File 2012 taxes late Registered long-term obligations with cash payments. File 2012 taxes late   If a registered long-term obligation has cash payments before maturity, backup withholding applies when a cash payment is made. File 2012 taxes late 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. File 2012 taxes late 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. File 2012 taxes late For any payment, the required withholding is limited to the cash paid. File 2012 taxes late Payee not the original owner. File 2012 taxes late   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). File 2012 taxes late The amount subject to backup withholding at maturity of a listed obligation must be determined using the issue price shown in Section I. File 2012 taxes late Bearer long-term obligations with cash payments. File 2012 taxes late   If a bearer long-term obligation has cash payments before maturity, backup withholding applies when the cash payments are made. File 2012 taxes late 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. File 2012 taxes late 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. File 2012 taxes late The required withholding at maturity is limited to the cash paid. File 2012 taxes late Sales and redemptions. File 2012 taxes late   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. File 2012 taxes late Backup withholding applies in the following situations. File 2012 taxes late The payee does not give you a TIN. File 2012 taxes late The IRS notifies you that the payee gave an incorrect TIN. File 2012 taxes late 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. File 2012 taxes late Payments outside the United States to U. File 2012 taxes late S. File 2012 taxes late person. File 2012 taxes late   The requirements for backup withholding and information reporting apply to payments of OID and interest made outside the United States to a U. File 2012 taxes late S. File 2012 taxes late 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. File 2012 taxes late S. File 2012 taxes late trade or business. File 2012 taxes late Payments to foreign person. File 2012 taxes late   The following discussions explain the rules for backup withholding and information reporting on payments to foreign persons. File 2012 taxes late U. File 2012 taxes late S. File 2012 taxes late -source amount. File 2012 taxes late   Backup withholding and information reporting are not required for payments of U. File 2012 taxes late S. File 2012 taxes late -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. File 2012 taxes late A U. File 2012 taxes late S. File 2012 taxes late resident is not a foreign person. File 2012 taxes late 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. File 2012 taxes late 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. File 2012 taxes late S. File 2012 taxes late person. File 2012 taxes late   For information about the 28% withholding tax that may apply to payments of U. File 2012 taxes late S. File 2012 taxes late -source OID or interest to foreign persons, see Publication 515. File 2012 taxes late Foreign-source amount. File 2012 taxes late   Backup withholding and information reporting are not required for payments of foreign-source OID and interest made outside the United States. File 2012 taxes late 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. File 2012 taxes late More information. File 2012 taxes late   For more information about backup withholding and information reporting on foreign-source amounts or payments to foreign persons, see Regulations section 1. File 2012 taxes late 6049-5. File 2012 taxes late Information for Owners of OID Debt Instruments This section is for persons who prepare their own tax returns. File 2012 taxes late It discusses the income tax rules for figuring and reporting OID on long-term debt instruments. File 2012 taxes late 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. File 2012 taxes late However, the information provided does not cover every situation. File 2012 taxes late More information can be found in the regulations under sections 1271 through 1275 of the Internal Revenue Code. File 2012 taxes late Including OID in income. File 2012 taxes late   Generally, you include OID in income as it accrues each year, whether or not you receive any payments from the debt instrument issuer. File 2012 taxes late Exceptions. File 2012 taxes late   The rules for including OID in income as it accrues generally do not apply to the following debt instruments. File 2012 taxes late U. File 2012 taxes late S. File 2012 taxes late savings bonds. File 2012 taxes late Tax-exempt obligations. File 2012 taxes late (However, see Tax-Exempt Bonds and Coupons, later. File 2012 taxes late ) Obligations issued by individuals before March 2, 1984. File 2012 taxes late Loans of $10,000 or less between individuals who are not in the business of lending money. File 2012 taxes late (The dollar limit includes outstanding prior loans by the lender to the borrower. File 2012 taxes late ) This exception does not apply if a principal purpose of the loan is to avoid any federal tax. File 2012 taxes late   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. File 2012 taxes late Publication 550 also discusses rules for holders of REMIC interests and CDOs. File 2012 taxes late De minimis rule. File 2012 taxes late   You can treat OID as zero if the total OID on a debt instrument is less than one-fourth of 1% (. File 2012 taxes late 0025) of the stated redemption price at maturity multiplied by the number of full years from the date of original issue to maturity. File 2012 taxes late Debt instruments with de minimis OID are not listed in this publication. File 2012 taxes late 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. File 2012 taxes late Also, the de minimis rules generally do not apply to tax-exempt obligations. File 2012 taxes late Example 2. File 2012 taxes late 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. File 2012 taxes late 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. File 2012 taxes late Under the de minimis rule, you can treat the OID as zero because the $20 discount is less than $25. File 2012 taxes late Example 3. File 2012 taxes late Assume the same facts as Example 2, except the debt instrument was issued at $950. File 2012 taxes late You must report part of the $50 OID each year because it is more than $25. File 2012 taxes late Choice to report all interest as OID. File 2012 taxes late   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. File 2012 taxes late See Constant yield method under Debt Instruments Issued After 1984, later, for more information. File 2012 taxes late   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. File 2012 taxes late For more information, see Regulations section 1. File 2012 taxes late 1272-3. File 2012 taxes late Purchase after date of original issue. File 2012 taxes late   A debt instrument you purchased after the date of original issue may have premium, acquisition premium, or market discount. File 2012 taxes late If so, the OID reported to you on Form 1099-OID may have to be adjusted. File 2012 taxes late For more information, see Showing an OID adjustment under How To Report OID, later. File 2012 taxes late The following rules generally do not apply to contingent payment debt instruments. File 2012 taxes late Adjustment for premium. File 2012 taxes late   If your debt instrument (other than an inflation-indexed debt instrument) has premium, do not report any OID as ordinary income. File 2012 taxes late Your adjustment is the total OID shown on your Form 1099-OID. File 2012 taxes late Adjustment for acquisition premium. File 2012 taxes late   If your debt instrument has acquisition premium, reduce the OID you report. File 2012 taxes late 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. File 2012 taxes late Adjustment for market discount. File 2012 taxes late   If your debt instrument has market discount that you choose to include in income currently, increase the OID you report. File 2012 taxes late Your adjustment is the accrued market discount for the year. File 2012 taxes late 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. File 2012 taxes late If you choose to use the constant yield method to figure accrued market discount, also see Figuring OID on Long-Term Debt Instruments, later. File 2012 taxes late The constant yield method of figuring accrued OID, explained in those discussions under Constant yield method, is also used to figure accrued market discount. File 2012 taxes late For more information concerning premium or market discount on an inflation-indexed debt instrument, see Regulations section 1. File 2012 taxes late 1275-7. File 2012 taxes late Sale, exchange, or redemption. File 2012 taxes late   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. File 2012 taxes late If you sold the debt instrument through a broker, you should receive Form 1099-B or an equivalent statement from the broker. File 2012 taxes late Use the Form 1099-B or other statement and your brokerage statements to complete Form 8949, and Schedule D (Form 1040). File 2012 taxes late   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. File 2012 taxes late Your basis, generally, is your cost increased by the OID you have included in income each year you held it. File 2012 taxes late 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. File 2012 taxes late   See chapter 4 of Publication 550 for more information about the tax treatment of the sale or redemption of discounted debt instruments. File 2012 taxes late Example 4. File 2012 taxes late Larry, a calendar year taxpayer, bought a corporate debt instrument at original issue for $86,235. File 2012 taxes late 00 on November 1 of Year 1. File 2012 taxes late The 15-year debt instrument matures on October 31 of Year 16 at a stated redemption price of $100,000. File 2012 taxes late The debt instrument provides for semiannual payments of interest at 10%. File 2012 taxes late Assume the debt instrument is a capital asset in Larry's hands. File 2012 taxes late The debt instrument has $13,765. File 2012 taxes late 00 of OID ($100,000 stated redemption price at maturity minus $86,235. File 2012 taxes late 00 issue price). File 2012 taxes late Larry sold the debt instrument for $90,000 on November 1 of Year 4. File 2012 taxes late Including the OID he will report for the period he held the debt instrument in Year 4, Larry has included $4,556. File 2012 taxes late 00 of OID in income and has increased his basis by that amount to $90,791. File 2012 taxes late 00. File 2012 taxes late Larry has realized a loss of $791. File 2012 taxes late 00. File 2012 taxes late All of Larry's loss is capital loss. File 2012 taxes late 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. File 2012 taxes late Form 1099-OID shows all OID income in box 1 except OID on a U. File 2012 taxes late S. File 2012 taxes late Treasury obligation, which is shown in box 8. File 2012 taxes late It also shows, in box 2, any qualified stated interest you must include in income. File 2012 taxes late (However, any qualified stated interest on Treasury inflation-protected securities can be reported on Form 1099-INT in box 3. File 2012 taxes late ) A copy of Form 1099-OID will be sent to the IRS. File 2012 taxes late Do not attach your copy to your tax return. File 2012 taxes late Keep it for your records. File 2012 taxes late 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. File 2012 taxes late 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. File 2012 taxes late Form 1099-OID not received. File 2012 taxes late   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. File 2012 taxes late Refiguring OID. File 2012 taxes late   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. File 2012 taxes late You bought the debt instrument at a premium or at an acquisition premium. File 2012 taxes late The debt instrument is a stripped bond or coupon (including zero coupon bonds backed by U. File 2012 taxes late S. File 2012 taxes late Treasury securities). File 2012 taxes late The debt instrument is a contingent payment or inflation-indexed debt instrument. File 2012 taxes late See the discussions under Figuring OID on Long-Term Debt Instruments or Figuring OID on Stripped Bonds and Coupons, later, for the specific computations. File 2012 taxes late Refiguring interest. File 2012 taxes late   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. File 2012 taxes late Nominee. File 2012 taxes late   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. File 2012 taxes late ” You must file another Form 1099-OID for each actual owner, showing the OID for the owner. File 2012 taxes late Show the owner of the debt instrument as the “recipient” and you as the “payer. File 2012 taxes late ”   Complete Form 1099-OID and Form 1096 and file the forms with the Internal Revenue Service Center for your area. File 2012 taxes late You must also give a copy of the Form 1099-OID to the actual owner. File 2012 taxes late However, you are not required to file a nominee return to show amounts belonging to your spouse. File 2012 taxes late See the Form 1099 instructions for more information. File 2012 taxes late   When preparing your tax return, follow the instructions under Showing an OID adjustment in the next discussion. File 2012 taxes late 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. File 2012 taxes late Form 1040 or Form 1040A required. File 2012 taxes late   You must use Form 1040 or Form 1040A (you cannot use Form 1040EZ) under either of the following conditions. File 2012 taxes late You received a Form 1099-OID as a nominee for the actual owner. File 2012 taxes late Your total interest and OID income for the year was more than $1,500. File 2012 taxes late Form 1040 required. File 2012 taxes late   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. File 2012 taxes late 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. File 2012 taxes late Also, you must use Form 1040 if you were charged an early withdrawal penalty. File 2012 taxes late Where to report. File 2012 taxes late   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. File 2012 taxes late Include all OID and periodic interest shown on any Form 1099-OID, boxes 1, 2, and 8, you received for the tax year. File 2012 taxes late Also include any other OID and interest income for which you did not receive a Form 1099. File 2012 taxes late Showing an OID adjustment. File 2012 taxes late   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. File 2012 taxes late   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. File 2012 taxes late If the OID, as adjusted, is less than the amount shown on Form 1099-OID, show the adjustment as follows. File 2012 taxes late Under your last entry on line 1, subtotal all interest and OID income listed on line 1. File 2012 taxes late Below the subtotal, write “Nominee Distribution” or “OID Adjustment” and show the OID you are not required to report. File 2012 taxes late Subtract that OID from the subtotal and enter the result on line 2. File 2012 taxes late If the OID, as adjusted, is more than the amount shown on Form 1099-OID, show the adjustment as follows. File 2012 taxes late Under your last entry on line 1, subtotal all interest and OID income listed on line 1. File 2012 taxes late Below the subtotal, write “OID Adjustment” and show the additional OID. File 2012 taxes late Add that OID to the subtotal and enter the result on line 2. File 2012 taxes late 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. File 2012 taxes late It also may depend on the type of the debt instrument. File 2012 taxes late There are different rules for each of the following debt instruments. File 2012 taxes late Corporate debt instruments issued after 1954 and before May 28, 1969, and government debt instruments issued after 1954 and before July 2, 1982. File 2012 taxes late Corporate debt instruments issued after May 27, 1969, and before July 2, 1982. File 2012 taxes late Debt instruments issued after July 1, 1982, and before 1985. File 2012 taxes late Debt instruments issued after 1984 (other than debt instruments described in (5) and (6)). File 2012 taxes late Contingent payment debt instruments issued after August 12, 1996. File 2012 taxes late Inflation-indexed debt instruments (including Treasury inflation-protected securities) issued after January 5, 1997. File 2012 taxes late Zero coupon bonds. File 2012 taxes late   The rules for figuring OID on zero coupon bonds backed by U. File 2012 taxes late S. File 2012 taxes late Treasury securities are discussed under Figuring OID on Stripped Bonds and Coupons, later. File 2012 taxes late 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. File 2012 taxes late The OID, which is taxed as ordinary income, generally equals the following amount. File 2012 taxes late   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. File 2012 taxes late If there is a loss on the sale of the debt instrument, the entire loss is a capital loss and no OID is reported. File 2012 taxes late 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. File 2012 taxes late For information about showing the correct OID on your tax return, see the discussion under How To Report OID, earlier. File 2012 taxes late Your basis in the debt instrument is increased by the OID you include in income. File 2012 taxes late Form 1099-OID. File 2012 taxes late   You should receive a Form 1099-OID showing OID for the part of the year you held the debt instrument. File 2012 taxes late However, if you paid an acquisition premium, you may need to refigure the OID to report on your tax return. File 2012 taxes late See Reduction for acquisition premium, later. File 2012 taxes late 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. File 2012 taxes late irs. File 2012 taxes late gov/pub1212 by clicking the link under Recent Developments. File 2012 taxes late Form 1099-OID not received. File 2012 taxes late    The OID listed is for each $1,000 of redemption price. File 2012 taxes late You must adjust the listed amount if your debt instrument has a different principal amount. File 2012 taxes late For example, if you have a debt instrument with a $500 principal amount, use one-half the listed amount to figure your OID. File 2012 taxes late   If you held the debt instrument the entire year, use the OID shown in Section I-A for a calendar year. File 2012 taxes late (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. File 2012 taxes late ) If you did not hold the debt instrument the entire year, figure your OID using the following method. File 2012 taxes late Divide the OID shown by 12. File 2012 taxes late 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. File 2012 taxes late This is the OID to include in income unless you paid an acquisition premium. File 2012 taxes late The reduction for acquisition premium is discussed next. File 2012 taxes late Reduction for acquisition premium. File 2012 taxes late   If you bought the debt instrument at an acquisition premium, figure the OID to include in income as follows. File 2012 taxes late 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. File 2012 taxes late This is the monthly OID. File 2012 taxes late Subtract from your cost the issue price and the accumulated OID from the date of issue to the date of purchase. File 2012 taxes late (If the result is zero or less, stop here. File 2012 taxes late You did not pay an acquisition premium. File 2012 taxes late ) 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. File 2012 taxes late Subtract the amount figured in (3) from the amount figured in (1). File 2012 taxes late This is the OID to include in income for each month you hold the debt instrument during the year. File 2012 taxes late Transfers during the month. File 2012 taxes late   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. File 2012 taxes late Your holding period for this purpose begins the day you acquire the debt instrument and ends the day before you dispose of it. File 2012 taxes late 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. File 2012 taxes late For information about showing the correct OID on your tax return, see How To Report OID, earlier. File 2012 taxes late Form 1099-OID. File 2012 taxes late   You should receive a Form 1099-OID showing OID for the part of the year you held the debt instrument. File 2012 taxes late However, if you paid an acquisition premium, you may need to refigure the OID to report on your tax return. File 2012 taxes late See Constant yield method and the discussions on acquisition premium that follow, later. File 2012 taxes late 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. File 2012 taxes late irs. File 2012 taxes late gov/pub1212 by clicking the link under Recent Developments. File 2012 taxes late Form 1099-OID not received. File 2012 taxes late    The OID listed is for each $1,000 of redemption price. File 2012 taxes late You must adjust the listed amount if your debt instrument has a different principal amount. File 2012 taxes late For example, if you have a debt instrument with a $500 principal amount, use one-half the listed amount to figure your OID. File 2012 taxes late   If you held the debt instrument the entire year, use the OID shown in Section I-A. File 2012 taxes late (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. File 2012 taxes late ) If you did not hold the debt instrument the entire year, figure your OID using either of the following methods. File 2012 taxes late Method 1. File 2012 taxes late    Divide the total OID for a calendar year by 365 (366 for leap years). File 2012 taxes late Multiply the result in (1) by the number of days you held the debt instrument during that particular year. File 2012 taxes late  This computation is an approximation and may result in a slightly higher OID than Method 2. File 2012 taxes late Method 2. File 2012 taxes late    Look up the daily OID for the first accrual period you held the debt instrument during a calendar year. File 2012 taxes late (See Accrual period under Constant yield method, next. File 2012 taxes late ) Multiply the daily OID by the number of days you held the debt instrument during that accrual period. File 2012 taxes late If you held the debt instrument for part of both accrual periods, repeat (1) and (2) for the second accrual period. File 2012 taxes late Add the results of (2) and (3). File 2012 taxes late This is the OID to include in income, unless you paid an acquisition premium. File 2012 taxes late (The reduction for acquisition premium is discussed later. File 2012 taxes late ) Constant yield method. File 2012 taxes late   This discussion shows how to figure OID on debt instruments issued after July 1, 1982, and before 1985, using a constant yield method. File 2012 taxes late OID is allocated over the life of the debt instrument through adjustments to the issue price for each accrual period. File 2012 taxes late   Figure the OID allocable to any accrual period as follows. File 2012 taxes late Multiply the adjusted issue price at the beginning of the accrual period by the debt instrument's yield to maturity. File 2012 taxes late Subtract from the result in (1) any qualified stated interest allocable to the accrual period. File 2012 taxes late Accrual period. File 2012 taxes late   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. File 2012 taxes late Your tax year will usually include parts of two accrual periods. File 2012 taxes late Daily OID. File 2012 taxes late   The OID for any accrual period is allocated equally to each day in the accrual period. File 2012 taxes late You must include in income the sum of the OID amounts for each day you hold the debt instrument during the year. File 2012 taxes late If your tax year includes parts of two or more accrual periods, you must include the proper daily OID amounts for each accrual period. File 2012 taxes late Figuring daily OID. File 2012 taxes late   The daily OID for the initial accrual period is figured using the following formula. File 2012 taxes late   (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. File 2012 taxes late Reduction for acquisition premium on debt instruments purchased before July 19, 1984. File 2012 taxes late   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. File 2012 taxes late 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. File 2012 taxes late Reduction for acquisition premium on debt instruments purchased after July 18, 1984. File 2012 taxes late   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. File 2012 taxes late However, the method of figuring the daily acquisition premium is different from the method described in the preceding discussion. File 2012 taxes late To figure the daily acquisition premium under this method, multiply the daily OID by the following fraction. File 2012 taxes late The numerator is the acquisition premium. File 2012 taxes late The denominator is the total OID remaining for the debt instrument after your purchase date. File 2012 taxes late Section I-A is available at www. File 2012 taxes late irs. File 2012 taxes late gov/pub1212 and clicking the link under Recent Developments. File 2012 taxes late Using Section I-A to figure accumulated OID. File 2012 taxes late   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. File 2012 taxes late The amount from the “Total OID to January 1, YYYY” column for your debt instrument. File 2012 taxes late The OID from January 1 of a calendar year to the date of purchase, figured as follows. File 2012 taxes late 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. File 2012 taxes late 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. File 2012 taxes late Add the amounts figured in (2a) and (2b). File 2012 taxes late 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. File 2012 taxes late You must include the OID in gross income whether or not you hold the debt instrument as a capital asset. File 2012 taxes late Your basis in the debt instrument is increased by the OID you include in income. File 2012 taxes late For information about showing the correct OID on your tax return, see How To Report OID, earlier. File 2012 taxes late Form 1099-OID. File 2012 taxes late   You should receive a Form 1099-OID showing OID for the part of a calendar year you held the debt instrument. File 2012 taxes late However, if you paid an acquisition premium, you may need to refigure the OID to report on your tax return. File 2012 taxes late See Constant yield method and Reduction for acquisition premium, later. File 2012 taxes late   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. File 2012 taxes late See Contingent Payment Debt Instruments or Inflation-Indexed Debt Instruments, later. File 2012 taxes late 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. File 2012 taxes late irs. File 2012 taxes late gov/pub1212 by clicking the link under Recent Developments. File 2012 taxes late Form 1099-OID not received. File 2012 taxes late   The OID listed is for each $1,000 of redemption price. File 2012 taxes late You must adjust the listed amount if your debt instrument has a different principal amount. File 2012 taxes late For example, if you have a debt instrument with a $500 principal amount, use one-half the listed amount to figure your OID. File 2012 taxes late   Use the OID shown in Section I-B for a calendar year if you held the debt instrument the entire year. File 2012 taxes late (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. File 2012 taxes late ) If you did not hold the debt instrument the entire year, figure your OID as follows. File 2012 taxes late Look up the daily OID for the first accrual period in which you held the debt instrument during a calendar year. File 2012 taxes late (See Accrual period under Constant yield method, later. File 2012 taxes late ) Multiply the daily OID by the number of days you held the debt instrument during that accrual period. File 2012 taxes late Repeat (1) and (2) for any remaining accrual periods in which you held the debt instrument. File 2012 taxes late Add the results of (2) and (3). File 2012 taxes late This is the OID to include in income for that year, unless you paid an acquisition premium. File 2012 taxes late (The reduction for acquisition premium is discussed later. File 2012 taxes late ) Tax-exempt bond. File 2012 taxes late   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. File 2012 taxes late You need to make this adjustment to determine if you have a gain or loss on a later disposition of the bond. File 2012 taxes late In general, use the rules that follow to determine your OID. File 2012 taxes late Constant yield method. File 2012 taxes late   This discussion shows how to figure OID on debt instruments issued after 1984 using a constant yield method. File 2012 taxes late (The special rules that apply to contingent payment debt instruments and inflation-indexed debt instruments are explained later. File 2012 taxes late ) OID is allocated over the life of the debt instrument through adjustments to the issue price for each accrual period. File 2012 taxes late   Figure the OID allocable to any accrual period as follows. File 2012 taxes late Multiply the adjusted issue price at the beginning of the accrual period by a fraction. File 2012 taxes late The numerator of the fraction is the debt instrument's yield to maturity and the denominator is the number of accrual periods per year. File 2012 taxes late The yield must be stated appropriately taking into account the length of the particular accrual period. File 2012 taxes late Subtract from the result in (1) any qualified stated interest allocable to the accrual period. File 2012 taxes late Accrual period. File 2012 taxes late   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. File 2012 taxes late For example, a debt instrument maturing on March 31 has accrual periods that end on September 30 and March 31 of each calendar year. File 2012 taxes late Any short period is included as the first accrual period. File 2012 taxes late   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. File 2012 taxes late However, the OID listed for these debt instruments in Section I-B has been figured using 6-month accrual periods. File 2012 taxes late Daily OID. File 2012 taxes late   The OID for any accrual period is allocated equally to each day in the accrual period. File 2012 taxes late Figure the amount to include in income by adding the OID for each day you hold the debt instrument during the year. File 2012 taxes late 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. File 2012 taxes late 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. File 2012 taxes late Figuring daily OID. File 2012 taxes late   The daily OID for the initial accrual period is figured using the following formula. File 2012 taxes late   (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. File 2012 taxes late Example 5. File 2012 taxes late On January 1 of Year 1, you bought a 15-year, 10% debt instrument of A Corporation at original issue for $86,235. File 2012 taxes late 17. File 2012 taxes late According to the prospectus, the debt instrument matures on December 31 of Year 15 at a stated redemption price of $100,000. File 2012 taxes late The yield to maturity is 12%, compounded semiannually. File 2012 taxes late The debt instrument provides for qualified stated interest payments of $5,000 on June 30 and December 31 of each calendar year. File 2012 taxes late The accrual periods are the 6-month periods ending on each of these dates. File 2012 taxes late The number of days for the first accrual period (January 1 through June 30) is 181 days (182 for leap years). File 2012 taxes late The daily OID for the first accrual period is figured as follows. File 2012 taxes late   ($86,235. File 2012 taxes late 17 x . File 2012 taxes late 12/2) – $5,000     181 days     = $174. File 2012 taxes late 11020 = $. File 2012 taxes late 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. File 2012 taxes late 17 + $174. File 2012 taxes late 11), or $86,409. File 2012 taxes late 28. File 2012 taxes late The number of days for the second accrual period (July 1 through December 31) is 184 days. File 2012 taxes late The daily OID for the second accrual period is figured as follows. File 2012 taxes late   ($86,409. File 2012 taxes late 28 x . File 2012 taxes late 12/2) – $5,000     184 days     = $184. File 2012 taxes late 55681 = $1. File 2012 taxes late 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, $174. File 2012 taxes late 11 ($. File 2012 taxes late 95665 × 182 days) plus $184. File 2012 taxes late 56 ($1. File 2012 taxes late 00303 × 184 days), or $358. File 2012 taxes late 67. File 2012 taxes late Add the OID to the $10,000 interest you report on your income tax return for Year 1. File 2012 taxes late Example 6. File 2012 taxes late 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. File 2012 taxes late Also, the interest payment dates are October 31 and April 30 of each calendar year. File 2012 taxes late The accrual periods are the 6-month periods ending on each of these dates. File 2012 taxes late The number of days for the first accrual period (May 1 through October 31) is 184 days. File 2012 taxes late The daily OID for the first accrual period is figured as follows. File 2012 taxes late   ($86,235. File 2012 taxes late 17 x . File 2012 taxes late 12/2) – $5,000     184 days     = $174. File 2012 taxes late 11020 = $. File 2012 taxes late 94625   184           The number of days for the second accrual period (November 1 through April 30) is 181 days (182 for leap years). File 2012 taxes late The daily OID for the second accrual period is figured as follows. File 2012 taxes late   ($86,409. File 2012 taxes late 28 x . File 2012 taxes late 12/2) – $5,000     181 days     = $184. File 2012 taxes late 55681 = $1. File 2012 taxes late 01965   181 If you hold the debt instrument through the end of Year 1, you must include $236. File 2012 taxes late 31 of OID in income. File 2012 taxes late This is $174. File 2012 taxes late 11 ($. File 2012 taxes late 94625 × 184 days) for the period May 1 through October 31 plus $62. File 2012 taxes late 20 ($1. File 2012 taxes late 01965 × 61 days) for the period November 1 through December 31. File 2012 taxes late The OID is added to the $5,000 interest income paid on October 31 of Year 1. File 2012 taxes late Your basis in the debt instrument is increased by the OID you include in income. File 2012 taxes late On January 1 of Year 2, your basis in the A Corporation debt instrument is $86,471. File 2012 taxes late 48 ($86,235. File 2012 taxes late 17 + $236. File 2012 taxes late 31). File 2012 taxes late Short first accrual period. File 2012 taxes late   You may have to make adjustments if a debt instrument has a short first accrual period. File 2012 taxes late 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. File 2012 taxes late (The remaining accrual periods begin on May 1 and November 1. File 2012 taxes late ) For this short period, figure the daily OID as described earlier, but adjust the yield for the length of the short accrual period. File 2012 taxes late You may use any reasonable compounding method in determining OID for a short period. File 2012 taxes late Examples of reasonable compounding methods include continuous compounding and monthly compounding (that is, simple interest within a month). File 2012 taxes late Consult your tax advisor for more information about making this computation. File 2012 taxes late   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. File 2012 taxes late Reduction for acquisition premium. File 2012 taxes late   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. File 2012 taxes late To figure the daily acquisition premium, multiply the daily OID by the following fraction. File 2012 taxes late The numerator is the acquisition premium. File 2012 taxes late The denominator is the total OID remaining for the debt instrument after your purchase date. File 2012 taxes late Example 7. File 2012 taxes late 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. File 2012 taxes late The adjusted issue price on November 1 of Year 1 is $86,409. File 2012 taxes late 28 ($86,235. File 2012 taxes late 17 + $174. File 2012 taxes late 11). File 2012 taxes late In this case, you paid an acquisition premium of $590. File 2012 taxes late 72 ($87,000 − $86,409. File 2012 taxes late 28). File 2012 taxes late The daily OID for the accrual period November 1 through April 30, reduced for the acquisition premium, is figured as follows. File 2012 taxes late 1) Daily OID on date of purchase (2nd accrual period) $1. File 2012 taxes late 01965*  2)  Acquisition premium $590. File 2012 taxes late 72    3)  Total OID remaining after purchase date ($13,764. File 2012 taxes late 83 − $174. File 2012 taxes late 11) 13,590. File 2012 taxes late 72   4) Line 2 ÷ line 3 . File 2012 taxes late 04346  5)  Line 1 × line 4 . File 2012 taxes late 04432  6)  Daily OID reduced for the acquisition premium. File 2012 taxes late Line 1 − line 5 $0. File 2012 taxes late 97533  * As shown in Example 6. File 2012 taxes late The total OID to include in income for Year 1 is $59. File 2012 taxes late 50 ($. File 2012 taxes late 97533 × 61 days). File 2012 taxes late 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. File 2012 taxes late In general, a contingent payment debt instrument provides for one or more payments that are contingent as to timing or amount. File 2012 taxes late If you hold a contingent payment bond, you must report OID as it accrues each year. File 2012 taxes late 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. File 2012 taxes late To figure OID accruals on contingent payment debt instruments, holders and issuers must use the noncontingent bond method. File 2012 taxes late Noncontingent bond method. File 2012 taxes late    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. File 2012 taxes late In general, holders and issuers accrue OID on this projected payment schedule using the constant yield method that applies to fixed payment debt instruments. File 2012 taxes late When a contingent payment differs from the projected fixed amount, the holders and issuers make adjustments to their OID accruals. File 2012 taxes late If the actual contingent payment is larger than expected, both the issuer and the holder increase their OID accruals. File 2012 taxes late If the actual contingent payment is smaller than expected, holders and issuers generally decrease their OID accruals. File 2012 taxes late Form 1099-OID. File 2012 taxes late   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. File 2012 taxes late For example, the amount may not be correct if the contingent payment was different from the projected amount. File 2012 taxes late If the amount in box 1 is not correct, you must figure the OID to report on your return under the following rules. File 2012 taxes late For information on showing an OID adjustment on your tax return, see How To Report OID, earlier. File 2012 taxes late Figuring OID. File 2012 taxes late   To figure OID on a contingent payment debt instrument, you need to know the “comparable yield” and “projected payment schedule” of the debt instrument. File 2012 taxes late The issuer must make these available to you. File 2012 taxes late Comparable yield. File 2012 taxes late   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. File 2012 taxes late The comparable yield is determined as of the debt instrument's issue date. File 2012 taxes late Projected payment schedule. File 2012 taxes late   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. File 2012 taxes late The projected payment schedule is created by the issuer as of the debt instrument's issue date. File 2012 taxes late It is used to determine the issuer's and holder's interest accruals and adjustments. File 2012 taxes late Steps for figuring OID. File 2012 taxes late   Figure the OID on a contingent payment debt instrument in two steps. File 2012 taxes late Figure the OID using the constant yield method (discussed earlier under Debt Instruments Issued After 1984 ) that applies to fixed payment debt instruments. File 2012 taxes late Use the comparable yield as the yield to maturity. File 2012 taxes late 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). File 2012 taxes late Do not treat any amount payable as qualified stated interest. File 2012 taxes late Adjust the OID in (1) to account for actual contingent payments. File 2012 taxes late If the contingent payment is greater than the projected fixed amount, you have a positive adjustment. File 2012 taxes late If the contingent payment is less than the projected fixed amount, you have a negative adjustment. File 2012 taxes late Net positive adjustment. File 2012 taxes late   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. File 2012 taxes late Treat a net positive adjustment as additional OID for the tax year. File 2012 taxes late Net negative adjustment. File 2012 taxes late   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. File 2012 taxes late Use a net negative adjustment to offset OID on the debt instrument for the tax year. File 2012 taxes late 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. File 2012 taxes late 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. File 2012 taxes late 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. File 2012 taxes late Basis adjustments. File 2012 taxes late   In general, increase your basis in a contingent payment debt instrument by the OID included in income. File 2012 taxes late Your basis, however, is not affected by any negative or positive adjustments. File 2012 taxes late Decrease your basis by any noncontingent payment received and the projected contingent payment scheduled to be received. File 2012 taxes late Treatment of gain or loss on sale or exchange. File 2012 taxes late   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. File 2012 taxes late 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. File 2012 taxes late If the debt instrument is a capital asset, treat any loss that is more than your prior OID accruals as a capital loss. File 2012 taxes late See Regulations section 1. File 2012 taxes late 1275-4 for exceptions to these rules. File 2012 taxes late Premium, acquisition premium, and market discount. File 2012 taxes late   The rules for accruing premium, acquisition premium, and market discount do not apply to a contingent payment debt instrument. File 2012 taxes late See Regulations section 1. File 2012 taxes late 1275-4 to determine how to account for these items. File 2012 taxes late Inflation-Indexed Debt Instruments This discussion shows how you figure OID on certain inflation-indexed debt instruments issued after January 5, 1997. File 2012 taxes late An inflation-indexed debt instrument is generally a debt instrument on which the payments are adjusted for inflation and d