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How To Do An Amended Tax Return

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How To Do An Amended Tax Return

How to do an amended tax return Publication 538 - Introductory Material Table of Contents IntroductionOrdering forms and publications. How to do an amended tax return Tax Questions. How to do an amended tax return Reminders Useful Items - You may want to see: Introduction Every taxpayer (individuals, business entities, etc. How to do an amended tax return ) must figure taxable income on the basis of an annual accounting period called a tax year. How to do an amended tax return The calendar year is the most common tax year. How to do an amended tax return Other tax years include a fiscal year and a short tax year. How to do an amended tax return Each taxpayer must use a consistent accounting method, which is a set of rules for determining when to report income and expenses. How to do an amended tax return The most commonly used accounting methods are the cash method and the accrual method. How to do an amended tax return Under the cash method, you generally report income in the tax year you receive it, and deduct expenses in the tax year in which you pay them. How to do an amended tax return Under the accrual method, you generally report income in the tax year you earn it, regardless of when payment is received. How to do an amended tax return You deduct expenses in the tax year you incur them, regardless of when payment is made. How to do an amended tax return This publication explains some of the rules for accounting periods and accounting methods. How to do an amended tax return In some cases, you may have to refer to other sources for a more in-depth explanation of the topic. How to do an amended tax return Comments and suggestions. How to do an amended tax return   We welcome your comments about this publication and your suggestions for future editions. How to do an amended tax return   You can write to us at the following address: Internal Revenue Service Business, Exempt Organization and International Forms and Publications Branch SE:W:CAR:MP:T:B 1111 Constitution Ave. How to do an amended tax return NW, IR-6526 Washington, DC 20224   We respond to many letters by telephone. How to do an amended tax return Therefore, it would be helpful if you would include your daytime phone number, including the area code, in your correspondence. How to do an amended tax return   You can email us at taxforms@irs. How to do an amended tax return gov. How to do an amended tax return Please put “Publications Comment” on the subject line. How to do an amended tax return You can also send us comments from www. How to do an amended tax return irs. How to do an amended tax return gov/formspubs. How to do an amended tax return Select “Comment on Tax Forms and Publications” under “More information. How to do an amended tax return ”   Although we cannot respond individually to each email, we do appreciate your feedback and will consider your comments as we revise our tax products. How to do an amended tax return Ordering forms and publications. How to do an amended tax return   Visit www. How to do an amended tax return irs. How to do an amended tax return gov/formspubs to download forms and publications, call 1-800–829–3676, or write to the address below and receive a response within 10 days after your request is received. How to do an amended tax return Internal Revenue Service 1201 N. How to do an amended tax return Mitsubishi Motorway Bloomington, IL 61705-6613 Tax Questions. How to do an amended tax return   If you have a tax question, check the information available on IRS. How to do an amended tax return gov or call 1-800-829-1040. How to do an amended tax return We cannot answer tax questions sent to the above address. How to do an amended tax return Reminders Photographs of missing children. How to do an amended tax return  The Internal Revenue Service is a proud partner with the National Center for Missing and Exploited Children. How to do an amended tax return Photographs of missing children selected by the Center may appear in this publication on pages that would otherwise be blank. How to do an amended tax return You can help bring these children home by looking at the photographs and calling 1-800-THE-LOST (1-800-843-5678) if you recognize a child. How to do an amended tax return Useful Items - You may want to see: Publication 537 Installment Sales 541 Partnerships 542 Corporations Form (and Instructions) 1128 Application To Adopt, Change, or Retain a Tax Year 2553 Election by a Small Business Corporation 3115 Application for Change in Accounting Method 8716 Election To Have a Tax Year Other Than a Required Tax Year See Ordering forms and publications, earlier for information about getting these publications and forms. How to do an amended tax return Prev  Up  Next   Home   More Online Publications
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The How To Do An Amended Tax Return

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