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

The IRS is outlining new actions and next steps to fix problems uncovered with the IRS’ review of tax-exempt applications and improve the wider processes and operations in place at the IRS. The report released by Principal Deputy Commissioner Danny Werfel reflects important findings, aggressive actions and the next steps to help the IRS make improvements. Other documents give specific highlights of those findings and actions.

The following table represents the current status of recommended actions from the Treasury Inspector General for Tax Administration's (TIGTA) report on IRS's tax-exempt area. The status of the recommended actions will be updated monthly. Use the link in the Status column to view the historical updates for each recommendation.

Recommended Actions Status


All recommendations are closed as of Jan. 31, 2014. In Recommendation 7, we continue to report on the number of original backlog cases monthly until those cases are closed. Most recent update: March 24, 2004.

No. Recommendation Lead ECD Status*
1 Ensure that the memorandum requiring the Director, Rulings and Agreements, to approve all original entries and changes to criteria included on the BOLO listing prior to implementation be formalized in the appropriate Internal Revenue Manual. Director, Exempt Organizations

06/28/2013
09/30/2013

 

Completed
2 Develop procedures to better document the reason(s) applications are chosen for review by the team of specialists (e.g., evidence of specific political campaign intervention in the application file or specific reasons the EO function may have for choosing to review the application further based on past experience). Director, Exempt Organizations 09/30/2013 Completed
3 Develop training or workshops to be held before each election cycle including, but not limited to, the proper ways to identify applications that require review of political campaign intervention activities. Director, Exempt Organizations 01/31/2014 Completed
4 Develop a process for the Determinations Unit to formally request assistance from the Technical Unit and the Guidance Unit. The process should include actions to initiate, track, and monitor requests for assistance to ensure that requests are responded to timely. Director, Exempt Organizations

06/28/2013
01/31/2014

 

Completed
5 Develop guidance for specialists on how to process requests for tax-exempt status involving potentially significant political campaign intervention. This guidance should also be posted to the Internet to provide transparency to organizations on the application process. Director, Exempt Organizations

06/27/2013
01/31/2014

 

Completed
6 Develop training or workshops to be held before each election cycle including, but not limited to: a) what constitutes political campaign intervention versus general advocacy (including case examples) and b) the ability to refer for follow-up those organizations that may conduct activities in a future year which may cause them to lose their tax-exempt status. Director, Exempt Organizations 01/31/2014 Completed
7 Provide oversight to ensure that potential political cases, some of which have been in process for three years, are approved or denied expeditiously. Director, Exempt Organizations 01/31/2014 Completed
8 Recommend to IRS Chief Counsel and the Department of the Treasury that guidance on how to measure the “primary activity” of I.R.C. § 501(c)(4) social welfare organizations be included for consideration in the Department of the Treasury Priority Guidance Plan. Commissioner, Tax Exempt and Government Entities 05/03/2013 Completed
9 The Director, EO, should develop training or workshops to be held before each election cycle including, but not limited to, how to word questions in additional information request letters and what additional information should be requested. Director, Exempt Organizations 01/31/2014 Completed

* Green = On schedule; Yellow = Behind schedule; Red = Significant issues

 

Page Last Reviewed or Updated: 24-Mar-2014

The Free Income Tax Preparation

Free income tax preparation Index A Accounting methods Accrual method, Accrual Method Cash method, Cash Method Change in, Change in Accounting Method Methods you can use, Methods you can use. Free income tax preparation Accounting periods 52-53 week tax year, 52-53-Week Tax Year Business purpose tax year, Business Purpose Tax Year Calendar year, Calendar Year Improper tax year, Improper Tax Year Partnerships, Partnership Accrual method Expenses, Expenses Income, Income Advance payments, Advance Payment for Services Sales, Advance Payment for Sales Services, Advance Payment for Services Assistance (see Tax help) B Business purpose tax year, Business Purpose Tax Year C Calendar year, Calendar Year Cash method, Income Expenses, Expenses Income, Income Change, accounting method, Change to accrual method. Free income tax preparation , Change in Accounting Method Comments on publication, Comments and suggestions. Free income tax preparation Constructive receipt of income, Constructive receipt. Free income tax preparation Corporation tax periods, Corporations (Other Than S Corporations and PSCs) Cost identification, Identifying Cost D Death of individual, short period return, Death of individual. Free income tax preparation E Economic performance, Economic Performance Excluded entities, cash method, Excluded Entities F Fiscal year, Fiscal Year Form 1128, Improper Tax Year, Change in Tax Year 8716, Making the election. Free income tax preparation , Making back-up election. Free income tax preparation 8752, Required payment for partnership or S corporation. Free income tax preparation , Activating election. Free income tax preparation 970, Adopting LIFO method. Free income tax preparation Free tax services, How To Get Tax Help H Help (see Tax help) I Inventories Cost identification, Identifying Cost FIFO, FIFO Method LIFO, LIFO Method Lower of cost or market, Lower of Cost or Market Method Perpetual or book, Perpetual or Book Inventory Retail method, Retail Method Specific identification, Specific Identification Method Uniform capitalization rules, Inventories. Free income tax preparation Valuing, Valuing Inventory M More information (see Tax help) P Partnerships, Partnership Personal service corporation, Partnerships, S Corporations, and Personal Service Corporations (PSCs) Limit, use of cash method, Qualified PSC. Free income tax preparation Required tax year, Partnerships, S Corporations, and Personal Service Corporations (PSCs), Personal Service Corporation (PSC) Publications (see Tax help) R Related persons, Related Persons S S corporations, S Corporation Section 444 election, Section 444 Election Short period return, Short period return. Free income tax preparation Short tax year, Short Tax Year Suggestions for publication, Comments and suggestions. Free income tax preparation T Tax help, How To Get Tax Help Tax year Change in, Change in Tax Year Corporations, Corporations (Other Than S Corporations and PSCs) Fiscal year, Fiscal Year Personal service corporation, Personal Service Corporation (PSC) S corporations, S Corporation Section 444 election, Section 444 Election Short tax year, Short Tax Year Taxpayer Advocate, Taxpayer Advocate Service. Free income tax preparation TTY/TDD information, How To Get Tax Help U Uniform capitalization rules Exceptions, Exceptions. Free income tax preparation General rules, Uniform Capitalization Rules Prev  Up     Home   More Online Publications