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Military State Tax

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Military State Tax

Military state tax Publication 1544 - Main Content Table of Contents Why Report These Payments? Who Must File Form 8300?What Payments Must Be Reported? What Is Cash? Taxpayer Identification Number (TIN) What Is a Related Transaction? What About Suspicious Transactions? When, Where, and What To File Examples Penalties How To Get Tax HelpLow Income Taxpayer Clinics (LITCs). Military state tax Why Report These Payments? Drug dealers and smugglers often use large cash payments to “launder” money from illegal activities. Military state tax Laundering means converting “dirty” or illegally-gained money to “clean” money. Military state tax The government can often trace this laundered money through the payments you report. Military state tax Laws passed by Congress require you to report these payments. Military state tax Your compliance with these laws provides valuable information that can stop those who evade taxes and those who profit from the drug trade and other criminal activities. Military state tax The USA PATRIOT Act of 2001 increased the scope of these laws to help trace funds used for terrorism. Military state tax Who Must File Form 8300? Generally, any person in a trade or business who receives more than $10,000 in cash in a single transaction or in related transactions must file Form 8300. Military state tax For example, you may have to file Form 8300 if you are a dealer in jewelry, furniture, boats, aircraft, or automobiles; a pawnbroker; an attorney; a real estate broker; an insurance company; or a travel agency. Military state tax Special rules for clerks of federal or state courts are discussed later under Bail received by court clerks. Military state tax However, you do not have to file Form 8300 if the transaction is not related to your trade or business. Military state tax For example, if you own a jewelry store and sell your personal automobile for more than $10,000 in cash, you would not submit a Form 8300 for that transaction. Military state tax Transaction defined. Military state tax    A “transaction” occurs when: Goods, services, or property are sold; Property is rented; Cash is exchanged for other cash; A contribution is made to a trust or escrow account; A loan is made or repaid; or Cash is converted to a negotiable instrument, such as a check or a bond. Military state tax Person defined. Military state tax   A “person” includes an individual, a company, a corporation, a partnership, an association, a trust, or an estate. Military state tax   Exempt organizations, including employee plans, are also “persons. Military state tax ” However, exempt organizations do not have to file Form 8300 for a more-than-$10,000 charitable cash contribution they receive since it is not received in the course of a trade or business. Military state tax Foreign transactions. Military state tax   You do not have to file Form 8300 if the entire transaction (including the receipt of cash) takes place outside of: The 50 states, The District of Columbia, Puerto Rico, or A possession or territory of the United States. Military state tax However, you must file Form 8300 if any part of the transaction (including the receipt of cash) occurs in Puerto Rico or a possession or territory of the United States and you are subject to the Internal Revenue Code. Military state tax Bail received by court clerks. Military state tax   Any clerk of a federal or state court who receives more than $10,000 in cash as bail for an individual charged with any of the following criminal offenses must file Form 8300: Any federal offense involving a controlled substance, Racketeering, Money laundering, and Any state offense substantially similar to (1), (2), or (3) above. Military state tax For more information about the rules that apply to court clerks, see Section 1. Military state tax 6050I-2 of the Income Tax Regulations. Military state tax What Payments Must Be Reported? You must file Form 8300 to report cash paid to you if it is: Over $10,000, Received as: One lump sum of over $10,000, Installment payments that cause the total cash received within 1 year of the initial payment to total more than $10,000, or Other previously unreportable payments that cause the total cash received within a 12-month period to total more than $10,000, Received in the course of your trade or business, Received from the same buyer (or agent), and Received in a single transaction or in related transactions (defined later). Military state tax What Is Cash? Cash is: The coins and currency of the United States (and any other country), and A cashier's check, bank draft, traveler's check, or money order you receive, if it has a face amount of $10,000 or less and you receive it in: A designated reporting transaction (defined later), or Any transaction in which you know the payer is trying to avoid the reporting of the transaction on Form 8300. Military state tax Cash may include a cashier's check even if it is called a “treasurer's check” or “bank check. Military state tax ” Cash does not include a check drawn on an individual's personal account. Military state tax A cashier's check, bank draft, traveler's check, or money order with a face amount of more than $10,000 is not treated as cash. Military state tax These items are not defined as cash and you do not have to file Form 8300 when you receive them because, if they were bought with currency, the bank or other financial institution that issued them must file a report on FinCEN Form 104. Military state tax Example 1. Military state tax You are a coin dealer. Military state tax Bob Green buys gold coins from you for $13,200. Military state tax He pays for them with $6,200 in U. Military state tax S. Military state tax currency and a cashier's check having a face amount of $7,000. Military state tax The cashier's check is treated as cash. Military state tax You have received more than $10,000 cash and must file Form 8300 for this transaction. Military state tax Example 2. Military state tax You are a retail jeweler. Military state tax Mary North buys an item of jewelry from you for $12,000. Military state tax She pays for it with a personal check payable to you in the amount of $9,600 and traveler's checks totaling $2,400. Military state tax Because the personal check is not treated as cash, you have not received more than $10,000 cash in the transaction. Military state tax You do not have to file Form 8300. Military state tax Example 3. Military state tax You are a boat dealer. Military state tax Emily Jones buys a boat from you for $16,500. Military state tax She pays for it with a cashier's check payable to you in the amount of $16,500. Military state tax The cashier's check is not treated as cash because its face amount is more than $10,000. Military state tax You do not have to file Form 8300 for this transaction. Military state tax Designated Reporting Transaction A designated reporting transaction is the retail sale of any of the following: A consumer durable, such as an automobile or boat. Military state tax A consumer durable is property, other than land or buildings, that: Is suitable for personal use, Can reasonably be expected to last at least 1 year under ordinary use, Has a sales price of more than $10,000, and Can be seen or touched (tangible property). Military state tax For example, a $20,000 car is a consumer durable, but a $20,000 dump truck or factory machine is not. Military state tax The car is a consumer durable even if you sell it to a buyer who will use it in a business. Military state tax A collectible (for example, a work of art, rug, antique, metal, gem, stamp, or coin). Military state tax Travel or entertainment, if the total sales price of all items sold for the same trip or entertainment event in one transaction (or related transactions) is more than $10,000. Military state tax To figure the total sales price of all items sold for a trip or entertainment event, you include the sales price of items such as airfare, hotel rooms, and admission tickets. Military state tax Example. Military state tax You are a travel agent. Military state tax Ed Johnson asks you to charter a passenger airplane to take a group to a sports event in another city. Military state tax He also asks you to book hotel rooms and admission tickets for the group. Military state tax In payment, he gives you two money orders, each for $6,000. Military state tax You have received more than $10,000 cash in this designated reporting transaction. Military state tax You must file Form 8300. Military state tax Retail sale. Military state tax   The term “retail sale” means any sale made in the course of a trade or business that consists mainly of making sales to ultimate consumers. Military state tax   Thus, if your business consists mainly of making sales to ultimate consumers, all sales you make in the course of that business are retail sales. Military state tax This includes any sales of items that will be resold. Military state tax Broker or intermediary. Military state tax   A designated reporting transaction includes the retail sale of items (1), (2), or (3) of the preceding list, even if the funds are received by a broker or other intermediary, rather than directly by the seller. Military state tax Exceptions to Definition of Cash A cashier's check, bank draft, traveler's check, or money order you received in a designated reporting transaction is not treated as cash if one of the following exceptions applies. Military state tax Exception for certain bank loans. Military state tax   A cashier's check, bank draft, traveler's check, or money order is not treated as cash if it is the proceeds from a bank loan. Military state tax As proof that it is from a bank loan, you may rely on a copy of the loan document, a written statement or lien instruction from the bank, or similar proof. Military state tax Example. Military state tax You are a car dealer. Military state tax Mandy White buys a new car from you for $11,500. Military state tax She pays you with $2,000 of U. Military state tax S. Military state tax currency and a cashier's check for $9,500 payable to you and her. Military state tax You can tell that the cashier's check is the proceeds of a bank loan because it includes instructions to you to have a lien put on the car as security for the loan. Military state tax For this reason, the cashier's check is not treated as cash. Military state tax You do not have to file Form 8300 for the transaction. Military state tax Exception for certain installment sales. Military state tax   A cashier's check, bank draft, traveler's check, or money order is not treated as cash if it is received in payment on a promissory note or an installment sales contract (including a lease that is considered a sale for federal tax purposes). Military state tax However, this exception applies only if: You use similar notes or contracts in other sales to ultimate consumers in the ordinary course of your trade or business, and The total payments for the sale that you receive on or before the 60th day after the sale are 50% or less of the purchase price. Military state tax Exception for certain down payment plans. Military state tax   A cashier's check, bank draft, traveler's check, or money order is not treated as cash if you received it in payment for a consumer durable or collectible, and all three of the following statements are true. Military state tax You receive it under a payment plan requiring: One or more down payments, and Payment of the rest of the purchase price by the date of sale. Military state tax You receive it more than 60 days before the date of sale. Military state tax You use payment plans with the same or substantially similar terms when selling to ultimate consumers in the ordinary course of your trade or business. Military state tax Exception for travel and entertainment. Military state tax   A cashier's check, bank draft, traveler's check, or money order received for travel or entertainment is not treated as cash if all three of the following statements are true. Military state tax You receive it under a payment plan requiring: One or more down payments, and Payment of the rest of the purchase price by the earliest date that any travel or entertainment item (such as airfare) is furnished for the trip or entertainment event. Military state tax You receive it more than 60 days before the date on which the final payment is due. Military state tax You use payment plans with the same or substantially similar terms when selling to ultimate consumers in the ordinary course of your trade or business. Military state tax Taxpayer Identification Number (TIN) You must furnish the correct TIN of the person or persons from whom you receive the cash. Military state tax If the transaction is conducted on the behalf of another person or persons, you must furnish the TIN of that person or persons. Military state tax If you do not know a person's TIN, you have to ask for it. Military state tax You may be subject to penalties for an incorrect or missing TIN. Military state tax There are three types of TINs. Military state tax The TIN for an individual, including a sole proprietor, is the individual's social security number (SSN). Military state tax The TIN for a nonresident alien individual who needs a TIN but is not eligible to get an SSN is an IRS individual taxpayer identification number (ITIN). Military state tax An ITIN has nine digits, similar to an SSN. Military state tax The TIN for other persons, including corporations, partnerships, and estates, is the employer identification number (EIN). Military state tax Exception. Military state tax   You are not required to provide the TIN of a person who is a nonresident alien individual or a foreign organization if that person or foreign organization: Does not have income effectively connected with the conduct of a U. Military state tax S. Military state tax trade or business; Does not have an office or place of business, or a fiscal or paying agent in the United States; Does not file a federal tax return; Does not furnish a withholding certificate described in §1. Military state tax 1441-1(e)(2) or (3) or 1. Military state tax 1441-5(c)(2)(iv) or (3)(iii) to the extent required under 1. Military state tax 1441-1(e)(4)(vii); Does not have to furnish a TIN on any return, statement, or other document as required by the income tax regulations under section 897 or 1445; or In the case of a nonresident alien individual, the individual has not chosen to file a joint federal income tax return with a spouse who is a U. Military state tax S. Military state tax citizen or resident. Military state tax What Is a Related Transaction? Any transactions between a buyer (or an agent of the buyer) and a seller that occur within a 24-hour period are related transactions. Military state tax If you receive over $10,000 in cash during two or more transactions with one buyer in a 24-hour period, you must treat the transactions as one transaction and report the payments on Form 8300. Military state tax For example, if you sell two products for $6,000 each to the same customer in 1 day and the customer pays you in cash, these are related transactions. Military state tax Because they total $12,000 (more than $10,000), you must file Form 8300. Military state tax More than 24 hours between transactions. Military state tax   Transactions are related even if they are more than 24 hours apart if you know, or have reason to know, that each is one of a series of connected transactions. Military state tax   For example, you are a travel agent. Military state tax A client pays you $8,000 in cash for a trip. Military state tax Two days later, the same client pays you $3,000 more in cash to include another person on the trip. Military state tax These are related transactions, and you must file Form 8300 to report them. Military state tax What About Suspicious Transactions? If you receive $10,000 or less in cash, you may voluntarily file Form 8300 if the transaction appears to be suspicious. Military state tax A transaction is suspicious if it appears that a person is trying to cause you not to file Form 8300 or is trying to cause you to file a false or incomplete Form 8300, or if there is a sign of possible illegal activity. Military state tax If you are suspicious, you are encouraged to call the local IRS Criminal Investigation Division as soon as possible. Military state tax Or, you can call the FinCEN Financial Institution Hotline toll free at 1-866-556-3974. Military state tax When, Where, and What To File The amount you receive and when you receive it determine when you must file. Military state tax Generally, you must file Form 8300 within 15 days after receiving a payment. Military state tax If the Form 8300 due date (the 15th or last day you can timely file the form) falls on a Saturday, Sunday, or legal holiday, it is delayed until the next day that is not a Saturday, Sunday, or legal holiday. Military state tax More than one payment. Military state tax   In some transactions, the buyer may arrange to pay you in cash installment payments. Military state tax If the first payment is more than $10,000, you must file Form 8300 within 15 days. Military state tax If the first payment is not more than $10,000, you must add the first payment and any later payments made within 1 year of the first payment. Military state tax When the total cash payments are more than $10,000, you must file Form 8300 within 15 days. Military state tax   After you file Form 8300, you must start a new count of cash payments received from that buyer. Military state tax If you receive more than $10,000 in additional cash payments from that buyer within a 12-month period, you must file another Form 8300. Military state tax You must file the form within 15 days of the payment that causes the additional payments to total more than $10,000. Military state tax   If you are already required to file Form 8300 and you receive additional payments within the 15 days before you must file, you can report all the payments on one form. Military state tax Example. Military state tax On January 10, you receive a cash payment of $11,000. Military state tax You receive additional cash payments on the same transaction of $4,000 on February 15, $5,000 on March 20, and $6,000 on May 12. Military state tax By January 25, you must file a Form 8300 for the $11,000 payment. Military state tax By May 27, you must file an additional Form 8300 for the additional payments that total $15,000. Military state tax Amending a Report?   If you are amending a report, check box 1a at the top of Form 8300. Military state tax Complete the form in its entirety (Parts I-IV) and include the amended information. Military state tax Do not attach a copy of the original report. Military state tax Where to file. Military state tax   Mail the form to the address given in the Form 8300 instructions. Military state tax Required statement to buyer. Military state tax   You must give a written or electronic statement to each person named on any Form 8300 you must file. Military state tax You can give the statement electronically only if the recipient agrees to receive it in that format. Military state tax The statement must show the name and address of your business, the name and phone number of a contact person, and the total amount of reportable cash you received from the person during the year. Military state tax It must state that you are also reporting this information to the IRS. Military state tax   You must send this statement to the buyer by January 31 of the year after the year in which you received the cash that caused you to file the form. Military state tax    You must keep a copy of every Form 8300 you file for 5 years. Military state tax Examples Example 1. Military state tax Pat Brown is the sales manager for Small Town Cars. Military state tax On January 6, 2009, Jane Smith buys a new car from Pat and pays $18,000 in cash. Military state tax Pat asks for identification from Jane to get the necessary information to complete Form 8300. Military state tax A filled-in form is shown in this publication. Military state tax Pat must mail the form to the address shown in the form's instructions by January 21, 2009. Military state tax He must also send a statement to Jane by January 31, 2010. Military state tax Example 2. Military state tax Using the same facts given in Example 1, suppose Jane had arranged to make cash payments of $6,000 each on January 6, February 6, and March 6. Military state tax Pat would have to file a Form 8300 by February 26 (17 days after receiving total cash payments within 1 year over $10,000 because February 21, 2009, is a Saturday). Military state tax Pat would not have to report the remaining $6,000 cash payment because it is not more than $10,000. Military state tax However, he could report it if he felt it was a suspicious transaction. Military state tax Penalties There are civil penalties for failure to: File a correct Form 8300 by the date it is due, and Provide the required statement to those named in the Form 8300. Military state tax If you intentionally disregard the requirement to file a correct Form 8300 by the date it is due, the penalty is the greater of: $25,000, or The amount of cash you received and were required to report (up to $100,000). Military state tax There are criminal penalties for: Willful failure to file Form 8300, Willfully filing a false or fraudulent Form 8300, Stopping or trying to stop Form 8300 from being filed, and Setting up, helping to set up, or trying to set up a transaction in a way that would make it seem unnecessary to file Form 8300. Military state tax If you willfully fail to file Form 8300, you can be fined up to $250,000 for individuals ($500,000 for corporations) or sentenced to up to 5 years in prison, or both. Military state tax These dollar amounts are based on Section 3571 of Title 18 of the U. Military state tax S. Military state tax Code. Military state tax The penalties for failure to file may also apply to any person (including a payer) who attempts to interfere with or prevent the seller (or business) from filing a correct Form 8300. Military state tax This includes any attempt to structure the transaction in a way that would make it seem unnecessary to file Form 8300. Military state tax Structuring means breaking up a large cash transaction into small cash transactions. Military state tax How To Get Tax Help You can get help with unresolved tax issues, order free publications and forms, ask tax questions, and get information from the IRS in several ways. Military state tax By selecting the method that is best for you, you will have quick and easy access to tax help. Military state tax Free help with your return. Military state tax   Free help in preparing your return is available nationwide from IRS-certified volunteers. Military state tax The Volunteer Income Tax Assistance (VITA) program is designed to help low-moderate income taxpayers and the Tax Counseling for the Elderly (TCE) program is designed to assist taxpayers age 60 and older with their tax returns. Military state tax Most VITA and TCE sites offer free electronic filing and all volunteers will let you know about credits and deductions you may be entitled to claim. Military state tax To find the nearest VITA or TCE site, visit IRS. Military state tax gov or call 1-800-906-9887 or 1-800-829-1040. Military state tax   As part of the TCE program, AARP offers the Tax-Aide counseling program. Military state tax To find the nearest AARP Tax-Aide site, call 1-888-227-7669 or visit AARP's website at www. Military state tax aarp. Military state tax org/money/taxaide. Military state tax   For more information on these programs, go to IRS. Military state tax gov and enter keyword “VITA” in the upper right-hand corner. Military state tax Internet. Military state tax You can access the IRS website at IRS. Military state tax gov 24 hours a day, 7 days a week to: Check the status of your 2011 refund. Military state tax Go to IRS. Military state tax gov and click on Where's My Refund. Military state tax Wait at least 72 hours after the IRS acknowledges receipt of your e-filed return, or 3 to 4 weeks after mailing a paper return. Military state tax If you filed Form 8379 with your return, wait 14 weeks (11 weeks if you filed electronically). Military state tax Have your 2011 tax return available so you can provide your social security number, your filing status, and the exact whole dollar amount of your refund. Military state tax E-file your return. Military state tax Find out about commercial tax preparation and e-file services available free to eligible taxpayers. Military state tax Download forms, including talking tax forms, instructions, and publications. Military state tax Order IRS products online. Military state tax Research your tax questions online. Military state tax Search publications online by topic or keyword. Military state tax Use the online Internal Revenue Code, regulations, or other official guidance. Military state tax View Internal Revenue Bulletins (IRBs) published in the last few years. Military state tax Figure your withholding allowances using the withholding calculator online at  www. Military state tax irs. Military state tax gov/individuals. Military state tax Determine if Form 6251 must be filed by using our Alternative Minimum Tax (AMT) Assistant available online at  www. Military state tax irs. Military state tax gov/individuals. Military state tax Sign up to receive local and national tax news by email. Military state tax Get information on starting and operating a small business. Military state tax Phone. Military state tax Many services are available by phone. Military state tax   Ordering forms, instructions, and publications. Military state tax Call 1-800-TAX-FORM (1-800-829-3676) to order current-year forms, instructions, and publications, and prior-year forms and instructions. Military state tax You should receive your order within 10 days. Military state tax Asking tax questions. Military state tax Call the IRS with your tax questions at 1-800-829-1040. Military state tax Solving problems. Military state tax You can get face-to-face help solving tax problems every business day in IRS Taxpayer Assistance Centers. Military state tax An employee can explain IRS letters, request adjustments to your account, or help you set up a payment plan. Military state tax Call your local Taxpayer Assistance Center for an appointment. Military state tax To find the number, go to www. Military state tax irs. Military state tax gov/localcontacts or look in the phone book under United States Government, Internal Revenue Service. Military state tax TTY/TDD equipment. Military state tax If you have access to TTY/TDD equipment, call 1-800-829-4059 to ask tax questions or to order forms and publications. Military state tax TeleTax topics. Military state tax Call 1-800-829-4477 to listen to pre-recorded messages covering various tax topics. Military state tax Refund information. Military state tax You can check the status of your refund on the new IRS phone app. Military state tax Download the free IRS2Go app by visiting the iTunes app store or the Android Marketplace. Military state tax IRS2Go is a new way to provide you with information and tools. Military state tax To check the status of your refund by phone, call 1-800-829-4477 (automated refund information 24 hours a day, 7 days a week). Military state tax Wait at least 72 hours after the IRS acknowledges receipt of your e-filed return, or 3 to 4 weeks after mailing a paper return. Military state tax If you filed Form 8379 with your return, wait 14 weeks (11 weeks if you filed electronically). Military state tax Have your 2011 tax return available so you can provide your social security number, your filing status, and the exact whole dollar amount of your refund. Military state tax If you check the status of your refund and are not given the date it will be issued, please wait until the next week before checking back. Military state tax Other refund information. Military state tax To check the status of a prior-year refund or amended return refund, call 1-800-829-1040. Military state tax Evaluating the quality of our telephone services. Military state tax To ensure IRS representatives give accurate, courteous, and professional answers, we use several methods to evaluate the quality of our telephone services. Military state tax One method is for a second IRS representative to listen in on or record random telephone calls. Military state tax Another is to ask some callers to complete a short survey at the end of the call. Military state tax Walk-in. Military state tax Many products and services are available on a walk-in basis. Military state tax   Products. Military state tax You can walk in to many post offices, libraries, and IRS offices to pick up certain forms, instructions, and publications. Military state tax Some IRS offices, libraries, grocery stores, copy centers, city and county government offices, credit unions, and office supply stores have a collection of products available to print from a CD or photocopy from reproducible proofs. Military state tax Also, some IRS offices and libraries have the Internal Revenue Code, regulations, Internal Revenue Bulletins, and Cumulative Bulletins available for research purposes. Military state tax Services. Military state tax You can walk in to your local Taxpayer Assistance Center every business day for personal, face-to-face tax help. Military state tax An employee can explain IRS letters, request adjustments to your tax account, or help you set up a payment plan. Military state tax If you need to resolve a tax problem, have questions about how the tax law applies to your individual tax return, or you are more comfortable talking with someone in person, visit your local Taxpayer Assistance Center where you can spread out your records and talk with an IRS representative face-to-face. Military state tax No appointment is necessary—just walk in. Military state tax If you prefer, you can call your local Center and leave a message requesting an appointment to resolve a tax account issue. Military state tax A representative will call you back within 2 business days to schedule an in-person appointment at your convenience. Military state tax If you have an ongoing, complex tax account problem or a special need, such as a disability, an appointment can be requested. Military state tax All other issues will be handled without an appointment. Military state tax To find the number of your local office, go to www. Military state tax irs. Military state tax gov/localcontacts or look in the phone book under United States Government, Internal Revenue Service. Military state tax Mail. Military state tax You can send your order for forms, instructions, and publications to the address below. Military state tax You should receive a response within 10 days after your request is received. Military state tax  Internal Revenue Service 1201 N. Military state tax Mitsubishi Motorway Bloomington, IL 61705-6613 Taxpayer Advocate Service. Military state tax   The Taxpayer Advocate Service (TAS) is your voice at the IRS. Military state tax Our job is to ensure that every taxpayer is treated fairly, and that you know and understand your rights. Military state tax We offer free help to guide you through the often-confusing process of resolving tax problems that you haven’t been able to solve on your own. Military state tax Remember, the worst thing you can do is nothing at all. Military state tax   TAS can help if you can’t resolve your problem with the IRS and: Your problem is causing financial difficulties for you, your family, or your business. Military state tax You face (or your business is facing) an immediate threat of adverse action. Military state tax You have tried repeatedly to contact the IRS but no one has responded, or the IRS has not responded to you by the date promised. Military state tax   If you qualify for our help, we’ll do everything we can to get your problem resolved. Military state tax You will be assigned to one advocate who will be with you at every turn. Military state tax We have offices in every state, the District of Columbia, and Puerto Rico. Military state tax Although TAS is independent within the IRS, our advocates know how to work with the IRS to get your problems resolved. Military state tax And our services are always free. Military state tax   As a taxpayer, you have rights that the IRS must abide by in its dealings with you. Military state tax Our tax toolkit at www. Military state tax TaxpayerAdvocate. Military state tax irs. Military state tax gov can help you understand these rights. Military state tax   If you think TAS might be able to help you, call your local advocate, whose number is in your phone book and on our website at www. Military state tax irs. Military state tax gov/advocate. Military state tax You can also call our toll-free number at 1-877-777-4778. Military state tax   TAS also handles large-scale or systemic problems that affect many taxpayers. Military state tax If you know of one of these broad issues, please report it to us through our Systemic Advocacy Management System at www. Military state tax irs. Military state tax gov/advocate. Military state tax Low Income Taxpayer Clinics (LITCs). Military state tax   Low Income Taxpayer Clinics (LITCs) are independent from the IRS. Military state tax Some clinics serve individuals whose income is below a certain level and who need to resolve a tax problem. Military state tax These clinics provide professional representation before the IRS or in court on audits, appeals, tax collection disputes, and other issues for free or for a small fee. Military state tax Some clinics can provide information about taxpayer rights and responsibilities in many different languages for individuals who speak English as a second language. Military state tax For more information and to find a clinic near you, see the LITC page on www. Military state tax irs. Military state tax gov/advocate or IRS Publication 4134, Low Income Taxpayer Clinic List. Military state tax This publication is also available by calling 1-800-829-3676 or at your local IRS office. Military state tax Free tax services. Military state tax   Publication 910, IRS Guide to Free Tax Services, is your guide to IRS services and resources. Military state tax Learn about free tax information from the IRS, including publications, services, and education and assistance programs. Military state tax The publication also has an index of over 100 TeleTax topics (recorded tax information) you can listen to on the telephone. Military state tax The majority of the information and services listed in this publication are available to you free of charge. Military state tax If there is a fee associated with a resource or service, it is listed in the publication. Military state tax   Accessible versions of IRS published products are available on request in a variety of alternative formats for people with disabilities. Military state tax DVD for tax products. Military state tax You can order Publication 1796, IRS Tax Products DVD, and obtain: Current-year forms, instructions, and publications. Military state tax Prior-year forms, instructions, and publications. Military state tax Tax Map: an electronic research tool and finding aid. Military state tax Tax law frequently asked questions. Military state tax Tax Topics from the IRS telephone response system. Military state tax Internal Revenue Code—Title 26 of the U. Military state tax S. Military state tax Code. Military state tax Links to other Internet based Tax Research Materials. Military state tax Fill-in, print, and save features for most tax forms. Military state tax Internal Revenue Bulletins. Military state tax Toll-free and email technical support. Military state tax Two releases during the year. Military state tax  – The first release will ship the beginning of January. Military state tax  – The final release will ship the beginning of March. Military state tax Purchase the DVD from National Technical Information Service (NTIS) at www. Military state tax irs. Military state tax gov/cdorders for $30 (no handling fee) or call 1-877-233-6767 toll free to buy the DVD for $30 (plus a $6 handling fee). 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Tax Information For Businesses

Small Business and Self-Employed Tax Center
Access to tax information useful to small businesses with assets of $10 million or less.

Large Business and International Tax Center
This page provides links which are helpful for large to mid-size businesses with assets greater than $10 million

Work Opportunity Tax Credit Extended
Businesses, including tax-exempt employers, may qualify for the Work Opportunity Tax Credit for qualified veterans hired before January 1, 2014.

Self-Employed Individuals Tax Center
The basics on your tax responsibilities if you are self-employed or an independent contractor.

Qualifying Advanced Energy Project Credit (section 48C)
Notice 2013-12, issued February 7, 2013, announced the availability of $150,228,397 in section 48C tax credits in the Phase II allocation round in 2013. Application procedures are different than in the first allocation round.

IRS Video Portal
The IRS Video portal contains video and audio presentations on topics of interest to small businesses, individuals and tax professionals. You will find video clips of tax topics, and archived versions of live panel discussions and webinars.

Effect of Sequestration on the Alternative Minimum Tax Credit for Corporations
The Balanced Budget and Emergency Deficit Reduction Act of 1985, as amended, requires certain spending cuts during Fiscal Year 2013 due to the sequester triggered earlier this year.

Alternative Motor Vehicle Credit
The Alternative Fuel Motor Vehicle Credit was enacted by the Energy Policy Act of 2005 and includes separate credits for four distinct categories of vehicles: Hybrid vehicles, Fuel Cell vehicles, Qualified Alternative Fuel Motor vehicles (QAFMV) and Advanced Lean Burn Technology vehicles. The amount of the potential credit varies by type of vehicle and which of the four credits applies.

Coordinated Issue Papers - LB&I
Effective January 21, 2014, all LB&I coordinated issue papers are decoordinated.  See 1/21/14 Directive from LB&I Commissioner Maloy for details.

HIRE Act: Questions and Answers for Employers
General information about the provisions of the Hiring Individuals to Restore Employment Act.

Employment Taxes
Federal income tax, Social Security and Medicare taxes, FUTA, self-employment tax and more.

Disaster Assistance and Emergency Relief for Individuals and Businesses
Special tax law provisions may help taxpayers and businesses recover financially from a disaster.

Small Business Forms and Publications
Download multiple small business and self-employed forms and publications.

e-file for Large Business and International (LB&I)
Certain large business and International (LB&I) corporations are required to electronically file their Forms 1120 and 1120S. Other corporations may do so voluntarily. This site provides e-file information for corporations that prepare and transmit their own electronic corporate income tax returns and those that use the services of third party tax professionals.

Employer ID Numbers (EINs)
Find out more on EINs or apply for one online.

Employee Tool & Equipment Plans
The Internal Revenue Service has established a compliance team to address the marketing and mistreatment of employee tool and equipment plans as tax-favored accountable plans.

Deducting Business Expenses
Find out what qualifies as a deductible business expense, including depreciation.

IRS Tax Calendar for Businesses and Self-Employed
The tax calendar is available for downloading and printing, or you can view it online.

U.S. Citizens and Resident Aliens Abroad
This section covers tax topics for U.S. citizens or resident aliens living overseas.

HCTC: Information for Health Plan Administrators (HPAs)
Health Plan Administrators are key to the success of the HCTC by providing health insurance to eligible individuals. Find information specific to health plan administrators here, including how to get involved and participate with the HCTC Program.

Excise Tax
Information about the various programs, databases, and activities within Excise Tax.

Industry Issue Resolution Program
The Industry Issue Resolution (IIR) Program resolves frequently disputed or burdensome tax issues. IRS solicits suggestions for issues for the program from taxpayers, representatives and associations.

Estate and Gift Taxes
General information on when these taxes apply and when they do not.

Filing Past Due Tax Returns
Understand how to file past due returns.

Information Returns Processing
The Information Reporting Program Website is designed to help you meet your Information Reporting Requirements. Included are help-line telephone numbers and direct links to aid you in reporting information returns. You will also find information about how to file returns electronically or magnetically.

LB&I Directives
LB&I Directives provide industry-related and administrative guidance to LB&I examiners to ensure consistent tax administration. The Directives do not establish Service position on legal issues and are not legal guidance.

Online Ordering for Information Returns and Employer Returns
Order information returns and employer returns online.

Manufacturers' Energy Efficient Appliance Credit
Act Section 305 - Modifications of Energy Efficient Appliance Credit for Appliances Produced After 2007

Audit Techniques Guides (ATGs)
These guides contain examination techniques to assist examiners in performing examinations.

1099-K Reporting Requirements for Payment Settlement Entities
Describes responsibilities of 1099-K filers and provides links to forms and publications.

Plug-In Electric Drive Vehicle Credit (IRC 30D)
Plug-In Electric Drive Vehicle Credit (IRC 30D) - Internal Revenue Code Section 30D provides a credit for Qualified Plug-in Electric Drive Motor Vehicles including passenger vehicles and light trucks.

Your Guide to an IRS Small Business Audit
Video series shows small business owners steps of an audit and answers questions about the process

Income from Abroad is Taxable
There have been recent reports about the interest of the Internal Revenue Service (IRS) in taxpayers with bank accounts in Liechtenstein. The IRS' interest, however, extends beyond bank accounts in Liechtenstein to financial accounts anywhere in the world. The IRS reminds you to report your worldwide income on your U.S. tax return and lists the possible consequences of hiding income overseas.

Quality Examination Process
The Quality Examination Process (QEP) is a systematic approach for engaging and involving Large Business and International (LB&I) taxpayers in the tax examination process, from the earliest planning stages through resolution of all issues and completion of the case.

Market Segment Understandings (MSU)
The IRS and taxpayers in particular market segments, work together to improve tax compliance.

Railroad Retirement Tax Act (RRTA) Desk Guide (January 2009)
This Desk Reference Guide is intended as a resource tool to assist Revenue Agents who are assigned the examination of a railroad employer. The Guide was prepared presuming that the reader has already received employment tax training.

Federal Payment Levy Program
Certain federal payments (OPM, SSA, federal employee salaries, and federal employee travel) disbursed by the Department of the Treasury, Financial Management Service (FMS) may be subject to a 15 percent levy through the Federal Payment Levy Program (FPLP) to pay your delinquent tax debt. Find out your appeal rights and how to resolve any dispute.

Research Credit
Guidelines and audit technique guide are provided for field examiners on the examination of Research Credit cases.

The International Tax Gap
Find resources on this page pertaining to the international tax gap — the difference between the amount of tax that taxpayers should pay and the amount that is paid voluntarily and on time. The tax gap can also be thought of as the sum of non-compliance with the tax law.

Uncertain Tax Positions - Schedule UTP
IRS finalized Schedule UTP & instructions for reporting uncertain tax positions by certain corporations.

IRS Non-Retaliation Policy
IRS has a zero-tolerance policy for retaliation and has had one in place since 1998.

Page Last Reviewed or Updated: 30-Mar-2014

The Military State Tax

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